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2. Is the interpretation of the expressions ‘de facto director’ and ‘shadow director’ sufficiently certain in the light of Smithton Ltd (formerly Hobart Capital Markets Ltd) v Nagger [2013] EWHC 1961 (Ch)?
help information please use cases please ,Please use cases of law and support the answer by statute
– Directors: appointment, board meetings, remuneration and removal.
A. Appointment and qualifications
1. Minimum number? 2 for public, 1 for private: s.154 CA 06.
Articles of association may set a minimum for the company
2. Maximum number? No max. set by statute.
Articles of association may set a maximum
3. Who? …any person occupying the position of director, by whatever name called:
s.250 CA 06
May be a company or other corporation: Re Bulawayo Market and Offices [1907]. The CA 85 did not mention corporate directors but s.155
CA 06 states that �a company must have at least one director who is a natural person.�
Three types of director:
(a) de jure – formally and properly appointed
(b) de facto – a person who is part of the governing structure of the company and who has assumed the status and functions of director:
Re Paycheck Services 3 Ltd, Revenue and Customs Commissioners v Holland [2011]
(c) shadow – see below
4. Shadow director
CA 06 s.251: �…a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
However, a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional
capacity.�
(Similar definitions appear in CDDA 86 s.22(5) and IA 86 s.251).
The interpretation offered by Millet J in Hydrodam (Corby) Ltd [1994] HC must be reconsidered in the light of Morritt LJ�s five
propositions in Secretary of State for Trade and Industry v Deverell [2000] CA:
(a) Since the purpose of the CDDA 86 was the protection of the public and since the definition was used in other legislative contexts
it should not be strictly construed just because it also had quasi-penal consequences in the context of the CDDA 86.
(b) The purpose of the definition was to identify those, other than professional advisers, with real influence in the corporate affairs
of the company. But it was not necessary that such influence had to be exercised over the whole field of its corporate activities
(c) Whether any particular communication, whether by words or conduct, should be classified as a direction or instruction had to be
determined objectively by the court in the light of all the evidence.
(d) Non-professional advice might fall within the definition. The concepts of �direction� and �instruction� did not exclude the concept
of �advice� since all three shared the common feature of �guidance�.
(e) It was not necessary to show that the directors had adopted a subservient role or surrendered their discretion
He also noted that it was not necessary for a shadow director to �lurk in the shadows�.
Interpretation in other cases:
A one-off reaction or response from the board would not satisfy ‘accustomed to act’: Sec of State v Becker [2003]
Where Ultraframe (UK) Ltd v Fielding 2005] EWHC 1638 Lewison J at para [1272] ‘a person at whose direction a governing majority of the
board is accustomed to act is capable of being a shadow director’.
Lecture Exercise 6.1
Seven people have been properly appointed as directors on the board of Zed Ltd. Do you think any of the following individuals should be
treated as shadow directors?
(a) Shane has not been appointed as a director but often offers his views to the board on what Zed Ltd should do next. Three directors
always ignore Shane completely. The other four, on a few occasions, have pushed for policies that are in line with Shane’s views.
(b) Alisha is an accountant in public practice who has been instructed by Zed Ltd to do its accounts. Alisha advises the board to
change their accounting reference date and the board agree unanimously to follow her advice.
(c) Sid is a solicitor who has done conveyancing for Zed Ltd in the past. Sid is now influencing the board in their decisions on which
properties to buy. Sid has been lending money to Zed Ltd at below prevailing interest rates and therefore the board are more than happy
to take his advice seriously.
5. Alternate directors Table A, Regs 65-69
The Companies (Model Articles) Regulations 2008 Sch 3 (for Public companies) Arts 25-27
6. Appointment procedure
(a) first directors
(b) subsequent directors:
Retirement by rotation: eg.
Table A Regs 73-80.
The Companies (Model Articles) Regulations 2008 Sch 3, Art 21
Public Co directors – proposed directors to be voted on individually, unless resolution agrees a single vote: s.160 CA 06
7. Share qualification (if required by the articles): s.291 CA 85 required directors to
obtain qualification within 2 months of appointment, or such shorter time as may be fixed by the articles. CA 06 has repealed this
statutory requirement.
8. Minimum age? None stated in CA 85 but s.157 CA 06 fixes a minimum age of 16.
9. Maximum age? s.293 CA 85 imposed a maximum age of 70 in public companies
and subsidiaries of public companies, with exceptions. CA 06 repealed s.293 CA 85 with effect from 6 April 2007.
10. Validity of acts …acts of a director or manager are valid notwithstanding any defect that may afterwards be discovered in his
appointment or qualification: s.161 CA 06 (previously, s.285 CA 85 – not quite as detailed)
but this does not apply where is no appointment at all: Morris v Kanssen [1946]
11. Legal position. A director is an �officer� of the company according to companies legislation (s.1173) but what other classifications
and concepts will be relevant? Fiduciary? Agent?
B. Board meetings
1. Legal requirements. Every company must record minutes of proceedings at directors’ meetings (s.248(1)) and keep minutes for 10 years
(s.248(2)).
A decision of directors will stand, even if not minuted: Re North Hallenbeagle Mining Co, Knight’s Case [1867].
Decisions must be taken at a meeting unless directors unanimous: Base Metal Trading v Shamurin [2004]
2. Provisions in the articles of association. Eg The Companies (Model Articles) Regulations 2008 Sch 1, Art 7(1) states that the
general rule is that any decision of the directors must be either by majority decision at a meeting or a decision taken unanimously
under Art 8.
3. UK Corporate Governance Code 2012
– following the ‘spirit of the code’
– ‘comply or explain’
Section A: Leadership
A.1: The Role of the Board
Main Principle
Every company should be headed by an effective board which is collectively responsible for the long-term success of the company.
Supporting Principles
The board�s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which
enables risk to be assessed and managed. The board should set the company�s strategic aims, ensure that the necessary financial and
human resources are in place for the company to meet its objectives and review management performance. The board should set the
company�s values and standards and ensure that its obligations to its shareholders and others are understood and met.
All directors must act in what they consider to be the best interests of the company, consistent with their statutory duties.
Code Provisions
A.1.1. The board should meet sufficiently regularly to discharge its duties effectively. There should be a formal schedule of matters
specifically reserved for its decision. The annual report should include a statement of how the board operates, including a high level
statement of which types of decisions are to be taken by the board and which are to be delegated to management.
C. Remuneration
1. Merely taking the office of director does not create a right to remuneration: Hutton v West Cork Railway [1883]
Provision for remuneration normally made in the articles of association.
Such provision must be followed: Guinness plc v Saunders [1990] HL
2. Other legal grounds for challenging remuneration:
(a) ‘a disguised gift out of capital’: Re Halt Garage (1964) Ltd [1982]
(b) unfair prejudice: s.994 CA 06. Excessive remuneration may be unfairly prejudicial, even if declared in the accounts: Re Annacott
Holdings [2012] EWCA Civ 998
3. Long term service contracts have to be approved (s.188 CA 06) although this can be done using the Duomatic principle: Wright v Atlas
Wright [1999]
UK Corporate Governance Code, D.1.5. – one year or less. ‘If it is necessary to offer longer notice or contract periods to new
directors recruited from outside, such periods should reduce to one year or less after the initial period.’
4. Directors remuneration report required in quoted companies: s.420 CA 06. Shareholder approval – non-binding vote on an ordinary
resolution at the general meeting at which the company’s accounts are laid: s.439 CA 06
eg In 2003 GlaxoSmithKline (GSK) was the first company to have its report voted down
5. UK Corporate Governance Code 2012
Section D: Remuneration
Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company
successfully, but a company should avoid paying more than is necessary for this purpose. A significant proportion of executive
directors� remuneration should be structured so as to link rewards to
corporate and individual performance.
There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration
packages of individual directors. No director should be involved in deciding his or her
own remuneration.
D. Removal of directors
Long term service contracts: s.188 CA 06 A service contract which entitles a director to employment for longer than 2 years must be
approved by resolution of members. Non-compliance will allow the company to terminate by the giving of reasonable notice: s.189.
Is it possible to approve a long term service contract under the �Duomatic principle�? There is no statutory purpose underlying the
procedural requirements of [what is now s.188] beyond the benefit and protection of shareholders, and shareholder consent is sufficient
under the principle in Re Duomatic: Wright v Atlas Wright (Europe) Ltd [1999] CA
Removing a director by a vote in general meeting:
s.168 CA 06 Members may pass ordinary resolution with special notice
s.169 CA 06 Director�s rights to protest: written representations and speaking on the resolution.
Options available to a director faced with threat of removal:
1. Use weighted voting rights to defeat resolution: Bushell v Faith [1970]
Lecture Exercise 6.2
Is there any way in which the Faith’s two sisters might have used the weighted voting rights clause in their favour?
2. If resolution is passed
(a) sue for any consequent breach of contract. Note that removal under s.168 does not deprive the director of any right to compensation
or damages: s.168(5)(a)
A failure to comply with s.188 may restrict the amount of damages.
(b) petition �unfair prejudice� under s.994 CA 06: Re I Fit Global Ltd, Also known as Blunt v Jackson [2013] EWHC 2090 (Ch)
(c) petition for winding up on the just and equitable ground under s.122(1)(g) IA 86
Is it a �quasi-partnership� company? Ebrahimi v Westbourne Galleries [1973] HL
S.125(2) IA 86 – order may be refused if there is an alternative remedy and petitioner is acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.
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