© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
Directors
IDENTIFYING DIRECTORS​​
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- Any person occupying the position of director
"In the Companies Acts “director” includes any person occupying the position of director, by whatever name called." (CA 2006, s.250)
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De Facto director​​
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- Persons in a position to prevent damage to creditors by taking proper steps
"[39]...All one can say, as a generality, is that all the relevant factors must be taken into account. But it is possible to obtain some guidance by looking at the purpose of the section. As Millett J said in Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, 182, the liability is imposed on those who were in a position to prevent damage to creditors by taking proper steps to protect their interests. As he put it, those who assume to act as directors and who thereby exercise the powers and discharge the functions of a director, whether validly appointed or not, must accept the responsibilities of the office. So one must look at what the person actually did to see whether he assumed those responsibilities in relation to the subject company." (HMRC v. Holland [2010] UKSC 51)
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- Must be acting on an equal footing with the de jure directors
"[54] I take these principles, adapted to the facts of this case, to be relevant:
(1) There is no single test by which a de facto director may be defined. The court must take into account all relevant factors.
(2) The following, although not constituting an exhaustive list, are of particular significance:
(i) Where the individual (the putative de facto director) was acting with one or more others who were true directors, whether he was acting on an equal footing with those others in directing its affairs.
(ii) Whether there was a holding out by the company of the individual as a director and whether he used the title.
(iii) Taking all the circumstances into account whether the individual was part of the corporate governing structure, that is to say the system by which the company is directed and controlled.
(3) Factor (i) is especially important. For someone to be held to be a de facto director alongside one or more de jure directors there must be clear evidence that he was acting on an equal footing with the other(s) in directing the affairs of the company.
(4) If it is unclear whether the acts of a person are referable to an assumed directorship, or to some other capacity such as a consultant, that person must be entitled to the benefit of the doubt, i.e. there will be no inference of a de facto directorship." (Elsworth Ethanol Company Limited v. Hartley [2014] EWHC 99 (IPEC), HHJ Hacon)
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- Was there some other capacity in which the act could properly have been carried out?
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"[88]...
1) The overall question to be answered when determining whether an individual is a de facto director of a company is whether the individual was part of the corporate governing structure of the company and whether he assumed a role in the company which imposed on him the fiduciary duties of a director (Holland at [94] and Smithton at [26] and [33]).
(2) This is a question of fact and degree, to be assessed objectively by reference to all the relevant evidence (Smithton at [35]-[45]).
(3) Merely being involved in the management of the company or exercising a degree of influence over its decision making is not in itself enough.
(4) An act will qualify as an act done in the capacity of a de facto director if the corporate governance of the company requires that an act of that nature can be done only by someone having the capacity of a de jure director.
(5) In general, the corporate governance of the company will have to be investigated in order to know whether the act in issue was directorial in nature.
(6) If the individual enjoyed some other capacity in which he could properly have done the act, it will not have been done as a de facto director." (Popely v. Popely [2019] EWHC 1507 (Ch), HHJ Hacon)
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Director of corporate director not de facto director of underlying company
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"[40] The problem that is presented by this case, however, is that Mr Holland was doing no more than discharging his duties as the director of the corporate director of the composite companies. Everything that he did was done under that umbrella. Mr Green QC for HMRC was unable to point to anything that he did which could not be said to have been done by him in his capacity as a director of the corporate director...
...
[42]...One can properly say, as Lord Macnaghten did about the company and its subscribers at p 51, that a company is at law a different person from its directors and that it is the intention of the enactment that this distinction should be recognised. I do not think that one can overcome this distinction by pointing, as Mr Green seeks to do, simply to the quality of the acts done by the director and asking whether he was the guiding spirit of the subject company or had a real influence over its affairs. As a test, that would create far too much uncertainty. Those who act as directors of a corporate director are entitled to know what it is that they can and cannot do when they are procuring acts by the corporate director. That is as true of a case such as this, where the affairs of the corporate director are effectively in the hands of one individual, as it is where there is a board comprised of several directors who always act collectively. As Lord Collins says (see paras 53 and 95, below), the question is one of law and it is a question of principle. I think that the guiding principle can be expressed in this way, unless and until Parliament provides otherwise. So long as the relevant acts are done by the individual entirely within the ambit of the discharge of his duties and responsibilities as a director of the corporate director, it is to that capacity that his acts must be attributed.
[43] It is, of course, right to bear in mind the interests of the creditors. Their protection lies in the remedies that are available for breach of the fiduciary duty that rests on the shoulder of every director. But the essential point, which Millett J was at pains to stress in Hydrodam, is that for a creditor of the subject company to obtain those remedies the individual must be shown to have been a director, not just of the corporate director but of the subject company too. I agree with Rimer LJ that, on the facts accepted by the deputy judge, it has not been shown that Mr Holland was acting as de facto director of the composite companies so as to make him responsible for the misuse of their assets. I also agree with the reasons that Lord Collins gives for reaching this conclusion." (HMRC v. Holland [2010] UKSC 51)
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- Person who the board are accustomed to act on the instructions or directions of
"(1) In the Companies Acts “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
(2) A person is not to be regarded as a shadow director by reason only that the directors act —
(a) on advice given by that person in a professional capacity;
(b) in accordance with instructions, a direction, guidance or advice given by that person in the exercise of a function conferred by or under an enactment;
(c) in accordance with guidance or advice given by that person in that person's capacity as a Minister of the Crown (within the meaning of the Ministers of the Crown Act 1975)
(3) A body corporate is not to be regarded as a shadow director of any of its subsidiary companies for the purposes of—
Chapter 2 (general duties of directors),
Chapter 4 (transactions requiring members' approval), or
Chapter 6 (contract with sole member who is also a director),
by reason only that the directors of the subsidiary are accustomed to act in accordance with its directions or instructions." (CA 2006, s.251)
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Shadow director​​
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- Major shareholder may become shadow director, but the fact that their views are relevant and influential is not sufficient
"[227] I need to consider a number of further points about shadow directors which may be material in this case. A major shareholder can act in a way whereby he becomes a shadow director. However, being a shareholder whose views are relevant and considered influential by the directors does not of itself make a shareholder a shadow director. In this context it is relevant to refer to a passage in Ultraframe at [1264]-[1269] where Lewison J discussed the position of a funder or a lender (whether or not also a shareholder). He said at [1268]:
"A lender is entitled to keep a close eye on what is done with his money, and to impose conditions on his support for the company. This does not mean he is running the company or is emasculating the powers of the directors, even if (given their situation) the directors feel that they have little practical choice but to accede to his requests. Similarly with customers who may, because of their buying power, be able effectively to dictate conditions to their suppliers (or the other way around). In other words a position of influence (even a position of strong influence) is not necessarily a fiduciary position. To find otherwise would place a wholly unfair and unnatural burden on men of business. In broad terms, I accept this submission."
Similar comments can be made in relation to an influential shareholder." (Instant Access Properties Limited v. Rosser [2018] EWHC 756 (Ch), Morgan J)
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- Shadow director owes fiduciary duties at least re the directions given to the de jure directors
"[142] In all the circumstances, there seem to me to be a number of reasons for thinking that shadow directors commonly owe fiduciary duties to at least some degree:
i) A shadow director will have assumed to act in relation to the company's affairs (to adapt Lord Browne-Wilkinson's words in White v Jones) and to ask the de jure directors to exercise powers that exist exclusively for the benefit of the company;
ii) A person who gives directions or instructions to a company's de jure directors in the belief that they will be acted on can fairly be described as assuming responsibility for the company's affairs, at least as regards the directions or instructions he gives;
iii) Although Parliament has not designated shadow directors as directors for all purposes in the Companies Acts[1], it has provided for important consequences to flow from the status. For example, a shadow director is treated as a director in the context of chapter 4 of part 10 of the Companies Act 2006 (transactions with directors requiring approval of members) and can be the subject of proceedings under the Company Directors Disqualification Act 1986 (see sections 6(3C) and 8(1)) and held liable for wrongful trading (see section 214(7) of the Insolvency Act 1986). Such provisions presumably reflect a perception that a shadow director can bear responsibility for a company's affairs;
iv) There is a compelling analogy with the position of promoters. Promoters owe fiduciary duties as a result of their acceptance and use of powers "which so greatly affect the interests of the corporation". A shadow director, too, can be said to choose to make use of powers which "greatly affect the interests of the corporation";
v) A shadow director's role in a company's affairs may be every bit as important as that of a de facto director, and de facto directors are considered to owe fiduciary duties;
vi) That a shadow director may not subjectively wish to assume fiduciary duties cannot matter as such;
vii) Public policy, so far as it may matter, points towards fiduciary duties being imposed on shadow directors.
[143] In the end, my own view is that Ultraframe understates the extent to which shadow directors owe fiduciary duties. It seems to me that a shadow director will typically owe such duties in relation at least to the directions or instructions that he gives to the de jure directors. More particularly, I consider that a shadow director will normally owe the duty of good faith (or loyalty) discussed below[2] when giving such directions or instructions. A shadow director can, I think, reasonably be expected to act in the company's interests rather than his own separate interests when giving such directions and instructions." (Vivendi SA v. Richards [2013] EWHC 3006 (Ch), Newey J)
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- May owe duties across full range of directors' decision-making where instructions are all encompassing/pervasive
"[56] It also follows that the extent of any fiduciary duty owed by a person who is in the position of being a shadow director will reflect the extent and nature of the instructions that he gives. Those acts of instruction are the basis of the relationship between him and the company (and its de jure directors). Fiduciary duties flow from relationships and it necessarily follows that when shadow directorship (and nothing else) is relied on as the source of the fiduciary duty, it is only those acts of instruction which can form the foundation for any fiduciary duties that he may owe.
[57] Thus, where any instructions are pervasive and all-encompassing, extending over the full range of the directors' decision-making, it is possible that the shadow director may owe fiduciary duties across the entire range of the company's activities. In other instances, the extent and nature of the instructions may be more restricted, being limited to particular aspects of the company's business or affairs. It seems to me that it follows that, where there is no relationship between the instruction and the act or omission of which complaint is made, it would be wrong in principle for any fiduciary duty to be owed. There is no principled basis on which a person whose shadow directorship arises out of unrelated matters ought thereby to be treated as having committed a breach of duty." (Standish v. RBS [2019] EWHC 3116 (Ch), Trower J)
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Shadow v. de facto director​​
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- Individual can simultaneously be both de facto and shadow director
"[88]...
(8) An act cannot be simultaneously carried out both in the capacity of a shadow director and a de facto director.
(9) An act which takes the form of directions or instructions to de jure directors will be an act done in the capacity of shadow director." ​(Popely v. Popely [2019] EWHC 1507 (Ch), HHJ Hacon)​
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- But same act cannot be carried out in both capacities
"[88]...
(7) It is possible for an individual to be simultaneously a de facto director and a shadow director of a company. The capacity in which he acts in relation to the company will depend on the nature of the act.
(8) An act cannot be simultaneously carried out both in the capacity of a shadow director and a de facto director.
(9) An act which takes the form of directions or instructions to de jure directors will be an act done in the capacity of shadow director." ​(Popely v. Popely [2019] EWHC 1507 (Ch), HHJ Hacon)
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APPOINTMENT​​
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- Must have at least one natural person as director
"(1)A company must have at least one director who is a natural person.
(2)This requirement is met if the office of director is held by a natural person as a corporation sole or otherwise by virtue of an office." (CA 2006, s.155)
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- Article may prevent sole director carrying out certain acts
"[21] Model Article 7(2) is also clear. It permits for a sole director to manage the company, but only in circumstances where no provision of the articles requires the company to have more than one director. Here, Bespoke Article 16.1 does require there to be multiple directors in order for board meetings to be quorate. Under Model Article 3, the role of the directors is to manage the company. To do this, under Model Article 7(1) they must act either through majority decision at a meeting or by unanimous decision under Model Article 8 (in which case the number of participating directors in the unanimous decision must still have been sufficient to form a quorum at a meeting). A provision in the articles requiring there to be at least two directors to constitute a quorum logically is a requirement that the company in question have two directors in order to manage its affairs. That is the purpose of the meetings. Bespoke Article 16.1 therefore does require there to be two directors and Model Article 7(2)(a) is, by its own terms, disapplied." (Hashmi v. Lorimer-Wing [2022] EWHC 191 (Ch), Deputy Judge Farnhill)
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REMOVAL​​
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- Court exercising discretion to call general meeting to allow majority shareholder to remove director
"[54]...In my judgment, the judge's exercise of his discretion is unimpeachable in this court. The shareholders have a statutory right to remove a director by ordinary resolution under section 168 of the 2006 Act. Section 168 thus reflects the statutory policy that shareholders should be able to remove a director by ordinary resolution. Section 168 does not override provisions as to the convening or conduct of meetings in a company's articles of association. However, the statutory policy reflected in section 168 must, in my judgment, far outweigh the power which Mr Butler has to paralyse company meetings by staying away. The court is not disturbing the bargain in the articles between the parties as to the balance of power between the shareholders by ordering a meeting with a quorum of one. Only Mr Smith has the benefit of a right to be part of the quorum because of the specific requirement in the articles that he must be counted towards the quorum requirement. Mr Butler enjoys no similar privilege. For the court not to make an order under section 306 on Mr Smith's application would have created a right ad hoc in favour of the minority shareholder that was not part of the bargain between the shareholders." (Smith v Butler [2012] EWCA Civ 314)
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NATURE AND STATUS​​
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- Director is not a servant
"A director is not a servant. He is a person who is doing business for the company, but not upon ordinary terms. It is not implied from the mere fact that he is a director, that he is to have a right to be paid for it." (Hutton v. West Cork railway Company (1883) 23 Ch D 654, CoA)
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Director as agent
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- Director is an agent
"What is the position of directors of a public company? They are merely agents of a company. The company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent. Wherever an agent is liable those directors would be liable; where the liability would attach to the principal, and the principal only, the liability is the liability of the company. This being a contract alleged to be made by the company, I own that I have not been able to see how it can be maintained that an agent can be brought into this court, or into any other court, upon a proceeding which simply alleges that his principal has violated a contract that he has entered into. In that state of things, not the agent, but the principal, would be the person liable." (Ferguson v. Wilson (1866) 2 Ch App 77 - 89 - 90, CoA, cited with approval in Kuwait Asia Bank AC v. National Mutual Life Nominees Ltd [1991] 1 AC 187 at 217)
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- Director votes at board meeting as agent of the company
"Perhaps another (and simpler) way of putting the matter is that a director is an agent, who casts his vote to decide in what manner his principal shall act through the collective agency of the board of directors; a shareholder who casts his vote in general meeting is not casting it as an agent of the company in any shape or form. His act, therefore, in voting as he pleases cannot in any way be regarded as an act of the company." (Northern Counties Securities Ltd v. Jackson & Steeple Ltd [1974] 2 All ER 625 at 635, Walton J)
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Director as employee​​
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- Sole director can negotiate and agree contract with himself in personal capacity
"Nor in their Lordships' view were any contractual obligations invalidated by the circumstance that the deceased was sole governing director in whom was vested the full government and control of the company. Always assuming that the company was not a sham then the capacity of the company to make a contract with the deceased could not be impugned merely because the deceased was the agent of the company in its negotiation. The deceased might have made a firm contract to serve the company for a fixed period of years. If within such period he had retired from the office of governing director and other directors had been appointed his contract would not have been affected. The circumstance that in his capacity as a shareholder he could control the course of events would not in itself affect the validity of his contractual relationship with the company. When, therefore, it is said that 'one of his first acts was to appoint himself the only pilot of the company,' it must be recognised that the appointment was made by the company, and that it was none the less a valid appointment because it was the deceased himself who acted as the agent of the company in arranging it." (Lee v. Lee's Air Farming Ltd [1961] AC 12)
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- Director who is also employee has two capacities
"...The fallacy of the argument for the respondent is the assumption that the functions of a director are identical with the functions of a managing director, or with the functions exercised by a director by virtue of his holding some subordinate post. It is enough to consider the managing director, for, it is a fortiori true that a director who occupies an employment subordinate to that of managing director has in that subordinate capacity different functions from a director. The managing director's powers and functions are defined by the terms of his appointment, his tenure of office is governed by these terms, his salary is specially fixed by them, and he is subject to the direction of the board. The difference between his position and that of a manager who is not a director is that he is also a director. But the functions of a director and manager are not identical. This seems to me too obvious to require from authority. But this was the view which was taken by Lord Maugham in Southern Foundries (1926,) Limited, v. Shirlaw1 (at p. 712), and he referred with approval to the Master of the Roll's observations upon it in the Court of Appeal. Though the majority of the noble and learned Lords took a different view of the merits of that case from that taken by Lord Maugham and the Master of the Rolls, I find nothing in the speeches of any of the majority which implies that the functions director and of a managing director are the same. In my opinion, therefore, the managing director has two functions and two capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for services. There is nothing anomalous in this; indeed it is a commonplace of law that the same individual may have two or more capacities, each including special rights and duties in relation to the same thing or matter or in relation to the same persons." (Anderson v. James Sutherland (Peterhead) Limited (1941) SC 203)
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- Inference that managing director who manages the company affairs and receives a salary is employee
"It seems to us that where it is established that a person has been appointed managing director of a company, that his duties include effective management of the affairs of the company in all its aspects, that he has discharged those duties, and that he has been remunerated by that company in the sense that he has received a salary from the hands of that company, the prima facie conclusion to be drawn is that he is an employee of the company. Whatever may at one time have been thought, it seems now to be established that a director appointed managing director, with duties of this kind, even though he has no separate contract, is in contractual relationship with the company, and is, for some purposes at least, to be considered an employee of the company: see Anderson v. James Sutherland (Peterhead) Ltd. , 1941S.C. 203, and Palmer's Company Law , 22nd ed. (1976), vol. 1, pp. 667–671. Accordingly, it seems to us upon the evidence so far summarised in this judgment that the presumptive position would be that the employee was an employee of the English company and entitled to make a claim for compensation for unfair dismissal." (Folami v. Nigerline (UK) Ltd [1978] ICR 277)
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- Sole director/sole employee no obstacle to employment relationship
"[28] Approaching the matter apart from authority, it might be thought that the main conceptual barrier in the way of such a company granting a valid employment contract to its "one man" would be that there could in practice be no relevant control of the putative employee so as to meet that particular condition of an employment contract. In theory, the control would be exercisable by the company, a legal person separate from the individual. In practice, it would be exercisable by the putative employee himself since he controls the company. It is easy to conclude that that cannot be real control, with the consequence that a central condition of a contract of employment is missing.
[29] It is, however, too late in the development of our jurisprudence, at any rate at the level of this court, to regard that particular control issue as providing a threshold obstacle to the creation of a valid contract of employment between a company and the one man who wholly controls it. The decision in Lee v. Lee's Air Farming Ltd [1961] AC 12 shows that it is not. Whilst, as a decision of the Privy Council, it is not strictly binding on us, its correctness as an authority has not, so far as we are aware, been challenged, nor did Mr Tolley challenge it. He recognised that this court regarded it as sound law in Bottrill.
...
[33]...The answer to that point, even in relation to a "one man company" case, is that the company and the one man are not the same person; and it is the company that exercises the relevant control. In Lee's case the employer was the company and the employee was Mr Lee. The control necessary for the purposes of the claimed contract of service was exercisable by the company and it made no difference that in practice, so long as Mr Lee remained the sole governing director, that control would be and was exercised by him as the company's agent. The close identity that in reality existed between the company and Mr Lee did not prevent a contract for service being created." (Secretary of State for Business v. Neufeld [2009] EWCA Civ 280, Rimer, Rix, Toulson LJJ)
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"There is no reason, therefore, to deny the possibility of a contractual relationship being created as between the deceased and the company. If this stage is reached then their lordships see no reason why the range of possible contractual relationships should not include a contract for services, and if the deceased as agent for the company could negotiate a contract for services as between the company and himself there is no reason why a contract of service could not be negotiated. It is said that therein lies the difficulty, because it is said that the deceased could not both be under the duty of giving orders and also be under the duty of obeying them. But this approach does not give effect to the circumstance that it would be the company and not the deceased that would be giving the orders. Control would remain with the company whoever might be the agent of the company to exercise it. The fact that so long as the deceased continued to be governing director, with amplitude of powers, it would be for him to act as the agent of the company to give the orders does not alter the fact that the company and the deceased were two separate and distinct legal persons. If the deceased had a contract of service with the company then the company had a right of control. The manner of its exercise would not affect or diminish the right to its exercise. But the existence of a right to control cannot be denied if once the reality of the legal existence of the company is recognised. Just as the company and the deceased were separate legal entities so as to permit of contractual relations being established between them, so also were they separate legal entities so as to enable the company to give an order to the deceased." (Lee v. Lee's Air Farming Ltd [1961] AC 12)
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- Would be exceptional for a one man company carrying on a genuine business to be a sham
"[34] We cannot leave Lee's case without a comment on Lord Morris's observation that it had not been, nor could be, suggested that "the company was a sham or a mere simulacrum" (our emphasis), an observation that has been discussed in the later authorities to which we shall come. It is a difficult expression because a registered company has legal personality. However, we consider that Lord Morris was probably there using the words "sham" and "mere simulacrum" as synonyms for essentially the same idea and had in mind the limited types of case in which an individual (as in Lee's case) owns all the shares in a company and the courts have considered it right for policy reasons to "pierce the veil" of incorporation and treat the company as the alter ego of the controlling shareholder, that is to treat them as one. In such a case, any suggestion that the individual had a service contract with the company would not succeed.
[35] It appears to us that such circumstances, at least in a case in which the company is a genuine trading company, would be exceptional. No such question arises in these appeals, nor did it arise in the authorities to which we were referred. We propose therefore to say no more about it..." (Secretary of State for Business v. Neufeld [2009] EWCA Civ 280, Rimer, Rix, Toulson LJJ)
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- Careful scrutiny of whether employment contract with sole director/shareholder is a sham
"[35]...On the other hand, as Bottrill in this court makes clear, a preliminary question which may more commonly arise in a case in which a controlling shareholder claims to have a service contract with his own company will be whether the putative contract (rather than the company) is genuine or a sham. That is because the reality in such cases is that the controlling shareholder will have been the directing mind and will behind the purported creation of his own contract. That factor will be likely in many cases to require a careful scrutiny of the claim that a valid employment contract has been created.
...
[37] In most cases in which there arises a question as to whether the claimed employment contract is a sham, there will be what purports to be a formal written contract, or at least a board minute or memorandum purporting to evidence or record the contract: a "shammer" is hardly likely to rest his case on the claim that his contract was an oral one. An inquiry into whether any purported contract does amount to a sham does not limit the court or tribunal to a consideration of the evidence as at the time of its making. It will usually also be highly material to see what the company on the one hand and the shareholder/director on the other have actually done under the purported contract: that will be likely to shed light on its genuineness or otherwise. In principle, however, a similar problem could arise where the alleged employment contract is an oral one, for it might be said in response that the basis on which such a contract is alleged is a mere pretence and is false. This court has recently considered the concept of a sham in an employment law context: Protectacoat Firthglow Ltd v. Miklos Szilagyi [2009] EWCA Civ 98." (Secretary of State for Business v. Neufeld [2009] EWCA Civ 280, Rimer, Rix, Toulson LJJ)
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Director as also contractor​​
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MANAGEMENT OF COMPANY AFFAIRS​​
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- Legislative recognition that services of director may be provided pursuant to contract with third party
"(1) For the purposes of this Part a director's “service contract”, in relation to a company, means a contract under which—
(a) a director of the company undertakes personally to perform services (as director or otherwise) for the company, or for a subsidiary of the company, or
(b) services (as director or otherwise) that a director of the company undertakes personally to perform are made available by a third party to the company, or to a subsidiary of the company.
(2) The provisions of this Part relating to directors' service contracts apply to the terms of a person's appointment as a director of a company.
They are not restricted to contracts for the performance of services outside the scope of the ordinary duties of a director." (CA 2006, s.227 for the purposes of the contracts being available for inspection under s.228)
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It logically follows from the case law regarding a director being an employee that the arrangement could equally amount to self-employment, e.g. if the company did not have sufficient control.
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- Directors responsible for management of company's business
"Subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company." (Private Model Article, Article 3)
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- Subject to delegation, power is vested in board of directors as whole/exercised through resolutions
"More recently the Court of Appeal in Re Westmid Packing Services Ltd, Secretary of State for Trade and Industry v Griffiths (1998) 2 All ER 124, (1998) 2 BCLC 646 at 130 of the former report accepted as correct the following propositions:
. . . the collegiate or collective responsibility of the board of directors of a company is of fundamental importance to corporate governance under English company law. That collegiate or collective responsibility must however be based on individual responsibility. Each individual director owes duties to the company to inform himself about its affairs and to join with his co-directors in supervising and controlling them.
A proper degree of delegation and division of responsibility is of course permissible, and often necessary, but not total abrogation of responsibility. A board of directors must not permit one individual to dominate them and use them, as Mr Griffiths plainly did in this case. Mr Davis commented that the appellants' contention (in their affidavits) that Mr Griffiths was the person who must carry the whole blame was itself a depressing failure, even then, to acknowledge the nature of a director's responsibility. There is a good deal of force in that point." (Re Landhurst Leasing plc [1999] 1 BCLC 286 at 346)
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- Litigation commenced by one director without authority of board not valid act of company, struck out
"There being, as I say, no resolution of the board authorising these proceedings, Mr Hornett is driven to submit to me that any director of the company by virtue of the powers conferred by reg 70 has the power, without reference to any other directors, and a fortiori without reference to shareholders, to cause proceedings to be instituted in the name of the company. It must follow from that submission that if a company has, shall one say, 24 directors, any of them at any time could institute proceedings against anyone else in the name of the company and there might well be a plurality of proceedings, some of which were approved by some directors, some of which were disapproved of by some directors, and so on. I do not read reg 70 as empowering a single director, where there is a board of directors, to institute proceedings without reference to his co-directors. I believe that reg 70, in its proper intent, means that the power to manage the company (and in this respect the business of the company (to use the wording of reg 70) must include the institution of proceedings in its name) is a power to be exercised by the board of directors. I do not believe that such business, and in particular the institution of such proceedings, can be carried on by a single director acting, as it were, as the board of directors.
...
It is for these reasons that I hold, on what I call this 'preliminary issue', that these proceedings were instituted without authority. In those circumstances, there not being in this case in contemplation any board meeting, as there was in contemplation in Breckland Group Holdings Ltd v London and Suffolk Properties Ltd a meeting which might ratify ab initio what had been done, I take the view that this action has to be struck out and not merely stayed, and that is the order which I make." (Mitchell & Hobbs (UK) Ltd v. Mill [1996] 2 BCLC 102, Deputy Judge Machin QC)
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But managing director will often have implied power to commence proceedings
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"[36] In my judgment, the last sentence that I have quoted goes too far. The managing director has certain powers by implication from his office. Even in a small company those powers will often include power to commence proceedings unless the board has expressly or by implication decided that such proceedings should not be taken or would be likely not to ratify the commencement of proceedings. In Mitchell & Hobbs, there were two directors who had fallen out with each other. As in this case one of the directors had sufficient shares to bring about the removal of the other. The warring directors would probably not agree that the board should ratify the commencement of the proceedings. The actual decision in the case was, therefore, correct. Moreover, it is important to note that the application in Mitchell & Hobbs was for summary judgment, and so no witnesses were heard. The judge could not, therefore, take the more obvious course of inquiring whether the director who had authorised the commencement of proceedings had acted in the best interests of the company as opposed to his own personal interest.
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[40] There is a corollary to the conclusion just reached about Mr Butler's powers as managing director of the Company: when Mr Butler caused the Company to instruct solicitors to take an active part in resisting the applications issued by Mr Smith, he had no power to do so. The judge so held and I agree. Mr Butler had no board authority and was causing the company to support the steps that he had wrongly taken." (Smith v Butler [2012] EWCA Civ 314)
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- Implied authority of managing director
"[61] It is common ground that authority to manage the affairs of a company is vested in its board of directors. The board usually delegates authority for particular matters to individual directors or officers. The delegation of authority can be express or implied. Often the conferring of authority on a particular individual is implied from his position. A managing director will have implied actual authority to do all such things as fall within the usual scope of that office: see Hely-Hutchinson v. Brayhead [1968] 1 QB 549 at 583 per Lord Denning MR." (LNOC Limited v. Watford Association Football Club Limited [2013] EWHC 3615 (Comm), HHJ Mackie QC)
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- Person may be de facto managing director
"[62] There need not be any formal appointment process for a director to be clothed with implied authority. If the board permits or authorises a director to act as a 'de facto' managing director, that director will have the authority which he would have had had he been formally appointed: see, for example, Hely-Hutchinson at 584." (LNOC Limited v. Watford Association Football Club Limited [2013] EWHC 3615 (Comm), HHJ Mackie QC - UBO was de facto managing director who entered into loan on behalf of company)
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- Implied delegation cannot exclude the power of the board
In this case, however, there is no express delegation of any specific powers by the board to Mr Butler. Mr Butler simply has a contract of employment appointing him as a managing director. This factual scenario is one that is likely to arise in many cases. On the other hand, it was clearly intended that some powers should be implicitly delegated to him. It would, however, be unusual for the powers of the board to be excluded. In those circumstances, the implied delegation of powers to Mr Butler cannot be interpreted as having that effect." (Smith v Butler [2012] EWCA Civ 314)
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- Extent of delegation is a matter of interpretation
"[28] Mr Dougherty's proposition is that, in principle, the implied powers of a managing director are those that would ordinarily be exercisable by a managing director in his position. In my judgment, Mr Dougherty's proposition is correct. In Hely-Hutchinson v Brayhead [1968] 1 QB 549 at 583, Lord Denning MR held that the board of directors, on appointing a managing director, "thereby impliedly authorise him to do all such things as fall within the usual scope of that office." Mr Dougherty's proposition is also supported by the passage that Mr Berragan cited from Gore-Browne on Companies. Another way of putting that point is that the managing director's powers extend to carrying out those functions on which he did not need to obtain the specific directions of the board. This is simply the default position. It is, therefore, subject to the company's articles and anything that the parties have expressly agreed. In essence, the issue is one of interpreting the contract of appointment or employment in the light of all the relevant background, and asking what that contract would reasonably be understood to have meant (Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1485, PC, and see my judgment in Stena Line v Merchant Navy Ratings Pension Fund Trustees Ltd [2010] EWCA Civ 543 at 36-41).
[29] On this basis, as might be expected, the test of what is within the implied actual authority of a managing director coincides with the test of what is within the ostensible authority of a managing director: see Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 176." (Smith v Butler [2012] EWCA Civ 314)
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- Managing director usually has to work within strategy set by board
"[30] The holder of the office of managing director might today more usually be called a chief executive officer in (at least) a public company. He or she has generally to work on the basis that his appointment does not supplant that of the role of the board and that he will have to refer back to the board for authority on matters on which the board has not clearly laid out the company's strategy. He or she would thus be expected to work within the strategy the board had actually set.
[31] In this case, however, it was clear that the strategy of the board was that Mr Smith should be executive chairman. Therefore, his suspension was clearly a matter for the board, and not for Mr Butler acting alone. To my mind it is inconceivable that Mr Butler did not need the instructions of the board on the question of the suspension of the chairman of the board. The fact that Mr Smith has special rights as a director and shareholder under the quorum provisions in the Company's articles reinforces this conclusion, but my conclusion does not rest on those provisions." (Smith v Butler [2012] EWCA Civ 314)
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- Board retains residual duty to supervise delegation
"[B2] This does not mean, of course, that directors cannot delegate. Subject to the articles of association of the company, a board of directors may delegate specific tasks and functions. Indeed, some degree of delegation is almost always essential if the company's business is to be carried on efficiently: to that extent there is a clear public interest in delegation by those charged with the responsibility for the management of a business. As the Earl of Halsbury LC put it in Dovey v Corey [1901] AC 477 at 486:
'The business of life could not go on if people could not trust those who are put in a position of trust for the express purpose of attending to details of management.'
In the same case, Lord Davey said ([1901] AC 477 at 492, [1895–9] All ER Rep 724 at 726):
'I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information, and advice of the chairman and general manager, as to whose integrity, skill, and competence he had no reason for suspicion.'
[B3] But just as the duty of an individual director as formulated by the Court of Appeal in Re Westmid Packing Services Ltd does not mean that he may not delegate, neither does it mean that, having delegated a particular function, he is no longer under any duty in relation to the discharge of that function, notwithstanding that the person to whom the function has been delegated may appear both trustworthy and capable of discharging the function.
As Sir Richard Scott V-C said when making a disqualification order against Mr Hawes:
'Overall responsibility is not delegable. All that is delegable is the discharge of particular functions. The degree of personal blameworthiness that may attach to the individual with the overall responsibility, on account of a failure by those to whom he has delegated particular tasks, must depend on the facts of each particular case. Sometimes there may be a question whether the delegation has been made to the appropriate person; sometimes there may be a question of whether the individual with overall responsibility should have checked how his subordinates were discharging their delegated functions. Sometimes the system itself, in which the failures have taken place, is an inadequate system for which the person with overall responsibility must take some blame.'
[B4] It is not in dispute in the instant case that where delegation has taken place the board (and the individual directors) will remain responsible for the delegated function or functions and will retain a residual duty of supervision and control. As Sir Richard Scott V-C made clear in the passage quoted above, the precise extent of that residual duty will depend on the facts of each particular case, as will the question whether it has been breached. These are matters which are in dispute in the instant case. It is the Secretary of State's case (denied by the respondents) that each of the respondents was incompetent in failing to discharge his individual duties as a director." (Re Barings Plc No.5 [1999] 1 BCLC 433 at 487 - 488)
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- Not acting in way director considers in company's best interests will vitiate actual authority (but negligence does not)
"[64] Mere negligence on a director's part will not vitiate a transaction. Correspondingly a director cannot have actual authority to act in a way which he does not consider in good faith to be in his company's interest. Provided that the director does not do so, he does not transgress the limit on his authority which s172 of the Act imposes. This duty is sometimes referred to for short as 'the duty to act in the best interests of the company'; it is subjective, not objective. The obligation is to act in a way that the director (not the Court) honestly believes to be in the company's best interests- see for example Extrasure Travel Insurances Ltd v Scattergood [2002] AllER (D) 307 at [87]. At this point the common ground (which I have taken from LNOC's skeleton) stops." (LNOC Limited v. Watford Association Football Club Limited [2013] EWHC 3615 (Comm), HHJ Mackie QC)
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- Shareholders' power to direct by special resolution
"(1) The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.
(2) No such special resolution invalidates anything which the directors have done before the passing of the resolution." (Private Model Article, Article 4)
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REMUNERATION​​
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- No automatic right to be paid for work as director
"Mr. Hardy has pressed upon us the fact that it is amply within the powers of an ordinary company to pay away money for the remuneration of its directors in the past. I do not say it is not so, within certain limits. But what is the remuneration of directors? I think it is pretty clear that, like the compensation for loss of the services of the managing director, it is a gratuity. A director is not a servant. He is a person who is doing business for the company, but not upon ordinary terms. It is not implied from the mere fact that he is a director, that he is to have a right to be paid for it. In some companies, not in railway companies, perhaps, so often as in other companies, but in some companies, there is a special provision for the way in which the directors should be paid; in others there is not. If there is a special provision for the way in which they are to be paid, yon must look to the special provision to see how to deal with it. But if there is no special provision their payment is in the nature of a gratuity, as was pointed out in the case cited by Mr. Cookson of Dunston v. Imperial Gas Light and Coke Company (1). Directors, under those circumstances, often do get money. But whenever they get it it is in the nature of a gratuity voted." (Hutton v. West Cork railway Company (1883) 23 Ch D 654, CoA)
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- Entitled to such remuneration as the directors determine
"(1) Directors may undertake any services for the company that the directors decide.
(2) Directors are entitled to such remuneration as the directors determine—
(a) for their services to the company as directors, and
(b) for any other service which they undertake for the company.
(3) Subject to the articles, a director’s remuneration may—
(a) take any form, and
(b) include any arrangements in connection with the payment of a pension, allowance or gratuity, or any death, sickness or disability benefits, to or in respect of that director.
(4) Unless the directors decide otherwise, directors’ remuneration accrues from day to day.
(5) Unless the directors decide otherwise, directors are not accountable to the company for any remuneration which they receive as directors or other officers or employees of the company’s subsidiaries or of any other body corporate in which the company is interested." (Private Co Model Articles, Article 19)
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- If board does not decide upon any remuneration, director gets nothing
"The effect of art 9 of the articles, coupled with art 108 in Table A, coupled with the fact that the applicant was a member of the company, in my judgment is that a contractd exists between himself and the company for payment to him of remuneration as managing director, and that remuneration depends on art 108 of Table A and is to be such amount “as the directors may determine”; in other words, the managing director is at the mercy of the board, he gets what they determine to pay him, and, if they do not determine to pay him anything, he does not get anything. That is his contract with the company, and those are the terms on which he accepts office. Since there is an express contract with the company in regard to the payment of remuneration, it seems to me that any question of quantum meruit is automatically excluded." (Re Richmond Gate Property Co Ltd [1964] 3 All ER 936, Plowman J)
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- Sums not agreed as remuneration were misappropriation of company assets
"[27] In the case of remuneration, it is quite plain from the evidence that it was not agreed that the directors should be paid salaries as such. What was agreed was that they should be paid with the profits of the company by way of dividend in order to avoid the adverse tax consequences of taking the money by way of salary. Accordingly, it seems to me to be arguable at least that Mr Larkin's liability is that of a director who has helped himself to the company's money and is therefore liable to account and to repay it...
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[29] The same is true of the year 2000 when, on his own evidence, Mr Larkin did not see any management accounts anyway against which to judge the very substantial drawings that he made in the course of the year. It is also clear that the justification for the drawings cannot have been remuneration either because it was agreed that remuneration should not be paid as such, but that the available money should be taken by way of dividend. The question then is: if s 727 applies, is there any real prospect that Mr Larkin would be relieved of liability?" (First Global Media Limited v. Larkin [2003] EWCA Civ 1765)
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- May be implied agreement that sums actually received were remuneration
"[20] Mr Russen’s submissions are based on a misconception that a payment can only properly be characterised as remuneration if there is a specific agreement fixing the level or rate of remuneration or defining a formula for ascertaining a definite amount to be paid. The essence of remuneration is that it is consideration for work done or to be done. The consideration may take different forms. It is not necessarily in the conventional form of a direct payment of a regular wage, salary cheque or credit. As Blackburn J said in R v. The Postmaster General (1876) 1 QBD 858 at 663-
“If a man gives his services, whatever consideration he gets for giving his services seems to me to be a remuneration for them. Consequently, I think if a person was in receipt of a payment or in the receipt of a percentage, or any kind of payment which would not be an actual money payment, the amount he would receive annually in respect of this would be “remuneration”…”
[21] In argument Mr Russen accepted that payments can have the character of remuneration if made, for example, to third parties in discharge of the debts of the person, who has done or is to do work, or if they take the form of commissions, fees or bonuses. The consideration may be a one off lump sum payment or it may be spread over a period. The obligation to pay need not arise from an express contract. Where no express agreement is reached on the level of remuneration the person, who has done or agreed to do work in circumstances in which it can be inferred that there was a common intention that he should be paid, is entitled to recover reasonable remuneration under an implied contract to pay a quantum meruit.
[22] The position here is simple. Mr Ellis did work for the Company. He received consideration from the Company. The judge was clearly entitled to infer that the consideration received was in respect of the work done for, or the services rendered by him to, the Company. It was plain from the evidence, in particular the minutes of the meeting of 27 October 1998, that all concerned in the discussions about the receipts of the directors from the Company’s funds (the accountant- Mr Nicholas Mayhew-as well as Mr Ellis and Mr Patel) regarded the payments as remuneration giving rise to potential tax consequences either for the recipients or for the Company, not as repayable loans." (Currencies Direct Limited v. Ellis [2002] EWCA Civ 779)
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- Articles not automatically binding between company and director in personal capacity
"[30] The articles of association of a company are as a result of statute a contract between the members of a company and the company in relation to their membership. The articles are not automatically binding as between a company and its officers as such. In so far as the articles are applicable to the relationship between a company and its officers, the articles may be expressly or impliedly incorporated in the contract between the company and a director. They will be so incorporated if the director accepts appointment 'on the footing of the Articles,' and relatively little may be required to incorporate the articles by implication: per Ferris J at para [26] of his judgment.
[31] In the present case I have no evidence as to the basis on which Mr Hall accepted his appointment as director of the company. Neither the articles of association of the company in general nor art 18 in particular are referred to in his witness statements. As far as I can see from the notes of the hearing before Master Foster, art 18 was not referred to, let alone relied upon. There is nothing to suggest that Mr Hall knew of art 18, or indeed that there might be relevant provisions in the constitution of the company, when he accepted his appointment, and given his total lack of experience or knowledge as to commercial matters he may have been ignorant of their existence. There is, it seems to me therefore, a real issue as to the incorporation of art 18 into any contract between Mr Hall and the company." (Globalink Telecommunications Ltd v. Wilmbury Ltd [2002] EWHC 1988 (QB), Burton J - different if director is also a shareholder - see above in Re Richmond Gate)
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Loans​​
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- Authorisation required
"(1) A company may not—
(a) make a loan to a director of the company or of its holding company, or
(b) give a guarantee or provide security in connection with a loan made by any person to such a director,
unless the transaction has been approved by a resolution of the members of the company.
(2) If the director is a director of the company's holding company, the transaction must also have been approved by a resolution of the members of the holding company." (CA 2006, s.197)
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"[40] Since a company is forbidden by s 330 of the Companies' Act to make loans to its own directors, these can only have been unauthorised payments. If they amounted, albeit unlawfully, to a loan, s 341(2) renders the appellant liable without more to account for the gain that the loan represents and to indemnify the company for what the company has lost." (First Global Media Limited v. Larkin [2003] EWCA Civ 1765)
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