What are the powers given to members of a limited company formation UK to ratify the actions of directors under Companies Act 2006?

04 Jan

For best company formation UK it is necessary to have a peaceful and progressive environment in the company. This environment develop only when the powers in England formation company are divided wisely between the members and the directors of the company. This article specifies about the division of powers in a general meeting and the authority given to members to ratify the acts of directors.

Members and Directors in a Corporate Body

The memorandum and the articles of association of a company that have to be prepared at the time when one is to register a company name UK and submitted to the registrar of the company, divide the authorities in a company between its members and directors. Apparently, majority authorities lie within the capacity of directors. However, the members are given certain special authorities to protect them from any unjust treatment in the company by the directors. Amongst these are the right to vary the articles of the company via passing special resolution. Another authority given to the members is to take decisions regarding the acts of breach committed by the directors.

Division of Authorities in a General Meeting

The powers are divided between the members and the directors in any general meeting by the constitution of the company. However, it may be contingent to important requirements given by the provisions of Companies Act 2006. The Model Articles provide clauses relevant to private companies especially for a limited company formation UK. If the constitution or articles of association of a company is not prepared when the owner of company wants to register a company name UK then the company has to adopt the Model Articles as default, as specified by Section 20 of Companies Act 2006.

Model Articles about Division of Powers

Model Articles specify clauses about division of powers in a private England formation company that is limited by shares.

General Power given to the Directors

  • Contingent to the articles, a company’s directors are given the duty to manage the transactions of the company and for fulfilling this duty, the directors are allowed to make use of every power of the company.

Protective Power given to the Shareholders

  • The shareholders are allowed, via passing a special resolution, to force the directors from abstaining from or to take any action.
  • However, the passing of any special resolution is not sufficient to annul any action of the directors that was taken before the passing of the resolution.


Decisions of Members related to the Violation of Rules by Directors

In the text mentioned above, it has been specified that the members are authorised to prevent the directors from taking any action that leads to a violation of directors’ duties. But it is not necessary that whenever a breach of duty is done by any director, the reason for it is to harm the interests of the company. For instance, the case of Regal v Gulliver as well as the case of Brady v Brady. So, even this is not necessary that every breach of duty done by the directors remains unsupported by majority of the members. They may be willing to support and hence for this purpose, they are given the authority to do so. If a proposal is given by the directors for indulging in an affair that does not lie within the scope of their authorities, or the affair leads to a violation of duties imposed on the directors, however, the affair is supported by majority of the members, and they wish the company to indulge in it, then the members can:

  • Take the decision to oblige the company to indulge in that affair. However, as in the case of Barron v Potter, the members were not given so independent powers to take any such action.
  • Give the authority to the directors to get indulged into any such affair. But here, again, it is required by the members to have powers to such an extent so as to make this possible.

In general, it happens that the members realise it after the event has happened that the directors violated their duties. In such a scenario, if the members still are willing to support the directors, then they take the following actions:

  • They can give ratification or in better words, approval to the questioned action of the directors. But it is only applicable when the approval is necessary for terming the action valid; or
  • They can give ratification, forgiveness or waive off the violation of duty. Thus, giving a surety to the directors, that the members of the company will not at any later stage, sue the directors for violating their duties. This proves its significance in situations where the company is acquired and the former board is replaced by a new one or in case of insolvency of the company, and the appointment of a liquidator is done in a way that the members who had once vowed to support the directors and their action, remain no more in a status to abide by their promises.

All the above mentioned options are apparently requiring conditions to be fulfilled that differ slightly. These requirements can be seen from some cases, for example, Re Horsley, Boschoek, Bamford, North-West Transportation etc. Such decisions of authorisation or ratification require a detailed investigation because of the risk that the directors in default can as members often acquire the authority to get results or impact the decisions of the company in a way that they may get saved in any unacceptable breach of duty.

Members giving their Consent

Companies Act 2006 dedicates its Section 180 for the topic of consent given by the members. It generally considers, the ratification given by the directors following the conditions specified by Companies Act 2006 regarding the dispute in interest for any member of the board. It also gives a consideration to the members’ consent for approving any transaction which is required by the act to get approved in such a manner. Also, it covers the protection of general law regarding ratification given by the company for allowing any action that would otherwise be termed as a violation of responsibilities given to the directors. The last possibility given is being reviewed in this Section.

Authorising the Actions taken by the Directors

Companies Act 2006 Section 239 states provisions that concern the protection of present regulations about authorising the directors’ acts, however, there is one alteration of significance in this section. Whenever the company decides to authorise the action taken by the directors which has resulted in any violation of duty or ignorance or default or violation of trust, regarding the company itself, this decision should be taken by the members but without depending on the votes of the directors as the members or any related individual. It is specified in Section 252 of Companies Act 2006 that what does “any individual related to the directors” actually mean. For matters concerning this section, the connected individual may also take into consideration the fellow directors as per Section 252(5)(d).

When the decision of ratification is made at a meeting, the members whose votes are not to be taken into consideration are allowed to attend the meeting, participate in the meeting and get the quorum in the meeting if their authorities allow them to, as mentioned in Section 239(4).

Right to Authorise Directors’ Acts in General Meeting

The company is allowed to take decision, authorising any act of directors which falls within the scope of company’s authorities but lies beyond the expanse of directors’ authorities, in a general meeting via passing an ordinary resolution. For further elaboration, consider the following case study.

Case Study: Grant v UK Switchback Railways Corporation

The 100th provision of Switchback Railways articles provided for the disqualification of any director in any meeting of board which concerned any agreement in which the director had any interest.  A consent was given by the directors of the company for auctioning the undertakings of the company to the United Kingdom Co, which is the 1st defendant in this case. The consent was given even when it was a known fact that they were promoting the purchasing company. The rest of the facts can be known from the verdict of the case.

It was stated by Cotton LJ that:

  • The appeal has been for a decision taken by Mr. Justice Chitty, for giving refusal to an injunction of restraining the United Kingdom firm and the Thompson’s firm for executing an agreement for auction of some of the undertaking of the latter firm to the former firm. The basis for such an appeal was that Thompson’s firm’s directors did not have any power to sign any such agreement because, the directors were disqualified by the articles from giving vote on any matter regarding an agreement in their interest. And in the present every director, excluding one, had interest in the agreement.
  • The application was made during the Long Vacations and was ordered to be postponed till the Michaelmas Sittings, whereas the agreement, was ordered, not be enforced during that time. However, the company was allowed to hold meetings with the members with shareholdings in relation to the agreement.
  • Thompson’s company arrange a general meeting of its shareholders and it also passed a resolution in the meeting to give consent for the adoption of the agreement and the resolution also gave power to the company’s directors to enforce the agreement. In this case, a judicial procedure was rejected by Mr. Justice Chitty, and hence, the plaintiff filed an application.
  • The appellant side presented an argument that as the directors had an interest in the contract, they were ineligible for signing a contract that would bind the company as a consequence. They also argued that simply by passing an ordinary resolution in a general meeting, the contract could not be enforced. The basis for this argument was that such an action was a modification of the articles for which the passing of a special resolution was mandatory.
  • They are mistaken as the ratification of any agreement which was signed by the directors without any power, thus, making it the company’s action does not resemble the alteration of company’s articles. Authorising the directors for taking actions in future which were not given permission by the articles, may be termed as a modification of the articles. But giving consent to any agreement which has been entered into via authority.
  • The appellant stressed that the signed agreement was void, and hence could not be allowed. The case is different. The agreement was signed for the company, but the contract had such a nature that it could not be brought into practice in contradiction to the company. The 100th article of the company refrained the company’s directors to impose a binding on the company via an agreement, but the provision did not specify any prohibition to the company for signing any contract.
  • Two passages given in the verdict of Irvine v Union Bank were given reference to. As they are a part of the same verdict, they have to be considered together. And in my opinion, these passages appear to express my thoughts. Authorising the directors for taking any action in future is not possible without the alteration of company’s articles. However, authorising any unratified action taken by company’s directors can be done merely via passing an ordinary resolution in a general meeting, if the action lies within the capacity of a company.

Lindley and Bowen LJJ gave similar verdicts.

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