Duty to disqualify unfit directors of insolvent companies

The court must impose a minimum disqualification of two years, if a person is or has been director of a company which has become insolvent and where his conduct as a director makes him unfit. Unifitness is defined as responsibility for the company becoming insolvent or for transactions which are voidable preferences. Other factors are taken into consideration by the court such as continuing to operate the company with a number of debts outstanding, general breaches of standard of care as a director for which an objective test is applied.

The liquidator, administrator or administrative receiver have a statutory duty to report to the Secretary of State if aware of evidence of a director’s unfitness. For this purpose, ‘director’ includes shadow directors. The maximum period of disqualification is 15 years. In Re Sevenoaks Stationers Ltd [1990] the Court of Appeal divided a 15 year period into three: ten or more years reserved for particularly serious cases, two to five years where the case is relatively not very serious, six to ten years for serious cases not meriting the top bracket.

The Company Secretary

Every company must have a company secretary. The first secretary is the person named in the statement of first directors and secretary filed with the Registrar before incorporation; subsequent appointments are made by the directors. The secretary may be an individual or a corporation but a corporation cannot be the secretary if its sole director is also the sole director of the company. A sole director cannot also be secretary.

The secretary of a private company is not required to have any professional qualifications but, for a public company, the directors must secure that the secretary either was a secretary of a public company before or who by virtue of his professional qualifications (as a chartered secretary, an accountant or a lawyer, or standing) appears to be capable of discharging the functions of a secretary.

The secretary is the chief administrative officer of the company and his duties include attending and minuting board and general meetings, authenticating certain documents, recording transfers of shares, keeping the company's books and registers and making necessary returns. The decision of Panorama Developments (Guildford) Ltd v. Fidelis Furnish Fabrics Ltd [1971]recognised that the secretary had ostensible authority to enter into contracts connected with the administrative side of the company's affairs 'such as employing staff, ordering cars and so forth’. Authority does not extend to commercial or trading contracts, and the company would not be liable for money borrowed in its name.

The secretary owes fiduciary duties to the company similar to those of a director and is liable to specific criminal penalties if he defaults in his statutory duties.

The Enforcement of Directors’ Duties

The rule in Foss v. Harbottle provides for majority rule. If there is a wrong against a company or an alleged irregularity in its internal management which is capable of confirmation by a simple majority of the members, the court will not interfere at the suit of a minority which must accept the decision of the majority. The minority can attempt to bring about change in the majority by the normal democratic process of persuasion and, if a minority shareholder does not agree with the majority, he can always sell his shares.

Common law exceptions to the rule in Foss v. Harbottle

Illegal acts

The majority have never been able to affirm an act which is ultra vires the company. The exception relates to other illegal acts such as financial assistance.

Decisions requiring qualified majority.

A majority cannot confirm a resolution by simple majority where the constitution of the company requires a qualified majority: in Edwards v. Halliwell [1950], a trade union's rules provided that members' subscriptions could only be increased by a special resolution of the delegates. The court allowed a minority action where the union purported to increase subscriptions by an ordinary resolution.

Personal rights of a shareholder

The minority shareholder can always enforce his personal rights as a shareholder: Fender v. Lushington (1877).

Where there is a fraud on the minority.

The concept of fraud on the minority involves an abuse of its power by the majority. This abuse can be directed at the minority shareholders where there is an attempt by the majority to compulsorily acquire the shares of the minority; alternatively the abuse can be directed against the company itself, as where the majority attempts to expropriate a corporate opportunity for itself. In both cases the minority can sue (i) to block an abusive use of majority power, Clemens v. Clemens Bros Ltd [1976], or (ii) to recover the company's expropriated property: Cook v. Deeks [1916].