Question 1

Can I be a Director?

Accepted Answer

Q: As a company we have directors, but being very small we have only two. One is a director and chair of the company, but is currently seriously ill. She has said she will have to resign her post, which means a new director will have to be elected. The association comprises 14 households, each having one share of the company. Our problem is most of the residents are very elderly and have no interest in becoming involved in running the association. Previously the directors have always been shareholders. My question is, should no householder/shareholder be put forward or be elected, can someone who is not a householder/shareholder become a director of the company? For instance, I do not live in a house within the association’s remit, and I am not a director. I volunteered as secretary as my wife’s very elderly mother lives in one of the houses and is a shareholder. Could someone with a link to a shareholder, or even with no link, become a director? FPRA Hon Consultant Roger Hardwick replies: Your Articles of Association should state who may be appointed as a director, and the process for appointment (eg by another director and/or by the members, at a general meeting). If the Articles contain no restriction, then a non-member may be appointed. If the Articles restrict the appointment of directors to members only, there are a number of options:

1. Continue with one director.

It is possible that the company’s articles specify a minimum number of directors, but even if they do, that should not affect the de facto ability of a director to make decisions on behalf of the company (see below).

2. Ignore the articles and appoint a non-member in any event.

Despite the various rules and restrictions on appointment to and holding of office by directors, the acts undertaken by those occupying the role of director are generally valid even if the appointment or office holding is flawed. See Palmer’s Company Law at para 8.2001.

In addition to the general and statutory rules that apply in relation to corporate contracting (and the acts of unauthorised directors), s.161 of the Companies Act 2006 provides that “[t]he acts of a person acting as a director are valid notwithstanding that it is afterwards discovered” that the appointment or holding of office was defective for various specified reasons. The purpose of s.161 is to protect third parties (both members and outsiders) against a company relying on a person’s lack of entitlement to act as a director in order to avoid obligations. It follows that any acts performed by a director that is not technically entitled to be a director; as regards third parties, are valid.

However, this is a risky option, because the director in question could be liable to the members for acting in breach of the company’s articles (so it is not recommended).

3. Call a general meeting and amend the company’s articles by special resolution, to permit non-member directors. (75 per cent of those present at the meeting would need to vote, assuming the meeting is quorate i.e. has the required minimum members present, which will be stated in the articles). You would need to follow the correct procedure (serving a notice of general meeting which complies with the company’s articles, and which set out the proposed wording of the amendment to the articles).

4. Although this is a more drastic measure, if the company ends up with no directors, it may be that you would wish to apply to the First-tier Tribunal (Property Chamber) to appoint a manager under Part II of the Landlord & Tenant Act 1987.

Question 2

Can I be a Director?

Accepted Answer

Q: As a company we have directors, but being very small we have only two. One is a director and chair of the company, but is currently seriously ill. She has said she will have to resign her post, which means a new director will have to be elected. The association comprises 14 households, each having one share of the company. Our problem is most of the residents are very elderly and have no interest in becoming involved in running the association. Previously the directors have always been shareholders. My question is, should no householder/shareholder be put forward or be elected, can someone who is not a householder/shareholder become a director of the company? For instance, I do not live in a house within the association’s remit, and I am not a director. I volunteered as secretary as my wife’s very elderly mother lives in one of the houses and is a shareholder. Could someone with a link to a shareholder, or even with no link, become a director? FPRA Hon Consultant Roger Hardwick replies: Your Articles of Association should state who may be appointed as a director, and the process for appointment (eg by another director and/or by the members, at a general meeting). If the Articles contain no restriction, then a non-member may be appointed. If the Articles restrict the appointment of directors to members only, there are a number of options:

1. Continue with one director.

It is possible that the company’s articles specify a minimum number of directors, but even if they do, that should not affect the de facto ability of a director to make decisions on behalf of the company (see below).

2. Ignore the articles and appoint a non-member in any event.

Despite the various rules and restrictions on appointment to and holding of office by directors, the acts undertaken by those occupying the role of director are generally valid even if the appointment or office holding is flawed. See Palmer’s Company Law at para 8.2001.

In addition to the general and statutory rules that apply in relation to corporate contracting (and the acts of unauthorised directors), s.161 of the Companies Act 2006 provides that “[t]he acts of a person acting as a director are valid notwithstanding that it is afterwards discovered” that the appointment or holding of office was defective for various specified reasons. The purpose of s.161 is to protect third parties (both members and outsiders) against a company relying on a person’s lack of entitlement to act as a director in order to avoid obligations. It follows that any acts performed by a director that is not technically entitled to be a director; as regards third parties, are valid.

However, this is a risky option, because the director in question could be liable to the members for acting in breach of the company’s articles (so it is not recommended).

3. Call a general meeting and amend the company’s articles by special resolution, to permit non-member directors. (75 per cent of those present at the meeting would need to vote, assuming the meeting is quorate i.e. has the required minimum members present, which will be stated in the articles). You would need to follow the correct procedure (serving a notice of general meeting which complies with the company’s articles, and which set out the proposed wording of the amendment to the articles).

4. Although this is a more drastic measure, if the company ends up with no directors, it may be that you would wish to apply to the First-tier Tribunal (Property Chamber) to appoint a manager under Part II of the Landlord & Tenant Act 1987.

Can I be a Director?

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