One of the crucial point to understand while getting knowledge about how to set up a company in London or UK effectively, is that the members are given authority to approve any action of the directors in a company. This power has to be utilised following certain restrictions.
Ratification of Directors’ Act in General Meeting
A firm is allowed to give authorisation to any action of the directors in a general meeting by passing an ordinary resolution provided that the act lies within the scope of company’s authorities, but, it is not in the capacity of directors.
For a broader understanding of the situation a case study is mentioned below:
Case Study: Re Horsley and Weight Limited
It was mentioned in company’s memorandum as its objectives that pensions would be given to the present and former employees and directors of the company. Also, it mentioned that every objective of the company should be read and interpreted as an isolated objective. Mr. Stephen Horsley, who was also the respondent, had remained the director of the company and played the role of an estimator for several years. Mr. Frank Horsley and Mr. Campbell Dick, who were the mere 2 persons having membership in the company at that material time, and their wives, were holding directorship of the company. When Mr. Stephen Horsley was about to take retirement from his active job when he was 65 years old, Mr. Frank Horsley and Mr. Campbell Dick proposed a scheme of pension for the advantage of Mr. Stephen Horsley. It was at an expense of 10,000 euros. The company became insolvent after one year and the validity of the pension scheme was accused by the liquidator.
Buckley LJ held:
- Now, I proceed towards the 2nd part of the argument given by Mr. Evans-Lombe. He stated that the buying of pension was impacted by the two directors of the company, namely, Mr. Frank Horsley and Mr. Campbell Dick, without getting authorisation from the board of directors in a general meeting. He further stated that it was an act of wrongfully exercising a legal power, and it was invalid as it contradicted the creditors of the company because of the fact that the only two shareholders in the company were Mr. Frank Horsley and Mr. Campbell Dick.
- If we ignore this fact for some time, the action taken by them was indeed accompanied by no approval of the directors’ board, neither pre-cursory, contemporary nor by ratifying it subsequently. The action was unauthorised, because only two amongst all the 5 directors in the company were not competent enough to conduct that transaction of the company. The action could only be considered as valid if it was given ratification in any form. However, being the only two shareholders of the company, Mr. Frank Horsley and Mr. Campbell Dick’s action may be termed valid.
- It has been stated by Mr. Evans-Lombe that generally, the directors are responsible in either case, if it is properly specified to owe to creditors or not, for keeping secure the capital fund of a company, which may be termed as that property of the company which cannot be distributed as dividends and also, they are not allowed to dispose it except for the advantage of the company.
- He also stated that the creditors are given the authority to expect that the directors will not go against their responsibility and although the creditors are not authorised to intervene in everyday administration of the company except which is a part of liquidation, but they are allowed to seek redress via the liquidators for any violation of duty by the directors. The members of the company do not have the authority to make a unanimous decision of depriving the creditors from any remedy given to them.
- Mr. Evans is dependent upon the case of Re Exchange, whose facts differ from the present case and the rules that were applied on that case also differ in my view. Any corporate body is not allowed to make a re-payment of the contributed capital other than by a ratified reduction of capital. But no such action took place in the current case.
- No provision in the law or statute keeps the directors or company away from expending a company’s contributed capital to perform something that has been made a part of the company’s objectives. In the case being dealt with currently, the effect of the cost on the scheme of pension was sustained while fulfilling an objective, mentioned expressly, of the company.
- If it is believed that the directors owe some kind of responsibility to the company’s creditors to keep safe the company’s contributed capital, then it will be a misapprehension. The creditors are given the authority to believe that the company will not pay again any amount of share capital that has been already paid, to the shareholders with an exemption of doing this by reducing the share capital in a duly authorised manner.
- They are also permitted to believe that the company’s directors will not conduct any action that leads to any such unauthorised repayment. It can be stated the company’s directors have a responsibility indirectly towards the creditors to prevent any unratified reduction in company’s capital, however, in my view, it is more correct to say that the directors owe this responsibility towards the company and in situations where the company has to liquidate because of any inappropriate repayment of the share capital, the liquidator has the responsibility towards the creditors to impose any right of the company by which the repayment can be done.
- On the other side, the directors on behalf of the company as well as their company are authorised to make any expenditure of the company’s contributed capital of the company, for any reason which lies within the capacity of a corporate body. As I have mentioned before, in my opinion the buying of scheme of pension lied within the capacity of the company. However, this did not lie in the authority of Mr. Frank Horsley and Mr. Campbell Dick when acting as individual directors instead of persons having membership of the directors’ board. The company cannot be bound by the action unless it is authorised effectually.
- But, Mr. Frank Horsley and Mr. Campbell Dick were also the only two persons holding shares in the company. If any matter lies within the capacity of a company, it is binding on the company when a unanimous consent is given for it by all the members of the company. As per Lord Davey in the case of Salomon.
- Also, consider Re Express, where the consent was given in an informal manner. There is no dispute in the fact that both, Mr. Frank Horsley and Mr. Campbell Dick showed their consent for this action. Both of them initiated the action by proposing it in a form and both of them signed the premium cheques.
- They are not being accused of not taking the action in good faith. Nor is there any doubt in the fact that they considered the interests of the financial condition of the company that were in their knowledge while signing it. In my views, when they gave consent for the action, it became a binding on the company and it was invulnerable by any action of the liquidator.
Similar verdicts were given by Templeman LJ and Cumming Bruce LJ.
Cumming Bruce LJ gave the following comments on the case:
- On the facts given in the case, there is no need to determine that if the misfeasance by the directors was proved or not, because they were allowed as shareholders to authorise their own negligence and to show prejudice to the claims made by the creditors. I would be surprised to know that the law was interpreted in such a manner.
Templeman LJ gave the following comments on this case study:
- If in case, there was any proof of wrongfully using the legal authority, it was apparent that paying 10,000 euros brought a reduction in the funds given to company’s creditors by that amount or by a large part of that amount, this is not satisfying me that the directors proved guilty of any act of misfeasance, although without any intention of fraud, could give an excuse because they were the only shareholders of the company and had authorised their negligence as shareholders which led to a loss of the creditors. The expanse of Section 333, (Insolvency Act 1986 Section 212) is limited and not necessary to do so at this event.
Effectivity of Resolution Ratifying Irregular Action of Directors
If any irregular action of directors is ratified via passing an ordinary resolution, it becomes invalid when it contradicts the articles of association of a company, which are designed at the time of ltd UK registration of company. After the company formation of United Kingdom these articles become a binding on the company and can only be subjected to any change via the approval of a special resolution. For further understanding a next case study of England company register is mentioned below.
Case Study: Boschoek Pty Ltd
The company’s directors intended to make appointment of Fuke as a managing director, by giving him remuneration of 700 euro every year, in spite the fact that the required amount shares as specified by the articles for qualification were not held in his own right by him. Also another fact was ignored that the articles permitted a maximum amount of remuneration of only 500 euros. The appointment was confirmed by passing a resolution in a general meeting by a unanimous consent. However, the resolution was termed null by the court.
Swinfen Eady J held that:
- The basis presented by the plaintiff company, for objecting the authenticity of the approved resolutions is that the same resolutions could have passed but after altering the articles via passing special resolutions.
- No appointment of Fuke as a managing director in the company could be made in a general meeting and the authorisation could not be done by the company as from December of 1901, because the number of shares required for qualification were not held by him and he was being offered a remuneration of 700 euros on a yearly basis, whereas the board was bound by the articles to a maximum remuneration of 500 euros.
- Unless there was any alteration brought in company’s articles, the board as well as the shareholders were equally bound by the articles. The present case does not resemble the case of Irvine v Union Bank, which was referred to, because in that case the restriction on the authority of borrowing or mortgaging was only a restriction on the powers of directors and not on the powers given to the company generally.
- An argument was given that the directors’ actions that exceeded the authorities of the directors may get authorised by the company and imposed a restriction and that argument succeeded. The articles need to be changed via the passing of special resolution, before any altered article is followed.
Hence, it can be seen from the two cases that: The first indicates that those actions of directors which are given approval by the shareholders of any England company register will be deemed as valid. Whereas the second case study shows that any action that is passed by an ordinary resolution in a general meeting of company will become invalid if it contradicts any articles devised at the time of company formation of United Kingdom and this remains applicable as long as the articles are not subjected to any relevant alteration.