Company Directors ( company law - concept 8 )

 

Who Are the Directors?

When you start a business, one of the first questions is: “Who actually runs the company?” This is where directors come in.

• Directors are the people responsible for managing a company.

• In small companies, directors are often the owners themselves. If you start a business with friends, it’s likely that you and your partners will be directors.

• In large companies (like ones listed on stock exchanges), directors are usually professionals chosen for their skills, not because they own shares.

Fun fact: In the UK, there’s no law forcing a director to have special qualifications or experience. You just need to be at least 16 years old.

Example:

Imagine a small café called Sunrise Coffee Ltd:

• Emma and Liam own 60% and 40% of the shares.

• Both are also directors. They decide daily operations, hire staff, and manage finances.

In contrast, in a big company like TechWorld Plc, a director might never make coffee or serve customers, but they decide on budgets, product launches, and major investments.

 Types of Directors

Not all directors are the same. Understanding the types is key:

1. De Jure Directors

• Formally appointed according to company rules.

• Usually listed in official company documents.

2. De Facto Directors

• Not formally appointed, but act like a director.

• Participate in meetings, make decisions, and manage company operations.

• Law treats them almost the same as de jure directors.

3. Shadow Directors

• Someone who tells the directors what to do without officially being one.

• Could be a major shareholder, family member, or advisor.

• Only responsible under the law for certain duties, depending on their instructions’ influence.

Example:

• A company has two directors, A and B.

• C (a shareholder’s child) regularly attends meetings, votes, and influences decisions → de facto director.

• D (the company lawyer) advises but doesn’t vote → not a director.

• E (big investor) instructs directors remotely, and they always follow → shadow director.

 Executive vs Non-Executive Directors

Another distinction is based on day-to-day involvement:

• Executive directors: Fully involved in running the company.

• Non-executive directors: Only attend board meetings and supervise, do not manage daily operations.

Example:

• Alex is the CEO of a startup – executive director.

• Sam is a board member who reviews finances but never manages staff – non-executive director.

 Director Disqualification

Sometimes, a director can be banned from managing any company. This is called disqualification, regulated by the Company Directors Disqualification Act 1986 (CDDA 1986).

Reasons for disqualification:

• Conviction for a crime

• Fraud or dishonesty

• Persistent breaches of company law

• Unfitness to manage a company

• Wrongful trading (letting a company continue trading while insolvent)

Example:

• Mia, a director, keeps mismanaging finances, leading the company to insolvency. The court can disqualify her for 2–15 years.

 Disqualification Undertakings

To avoid expensive court procedures, a director can voluntarily promise not to manage a company for a set period.

• Legally binding like a court order

• Covers all roles, even indirect ones (like consultant or receiver)

Compensation Orders

Disqualification prevents future misbehavior, but what about past damage?

• Courts can order directors to compensate creditors if their actions caused financial loss.

• The amount depends on:

  • Loss suffered by creditors

  • Severity of the director’s misconduct

  • Any previous payments made

Example:

• A director misuses company funds. Creditors lose money. Court orders them to pay compensation to cover losses.

 Appointment of Directors

When you register a company, you must name at least one director (depending on local law).

• In private companies, it can be just you.

• In public or listed companies, there must usually be at least two directors.

 How are directors appointed?

There are two main ways:

1. By the shareholders (owners) — during or after company formation.

2. By the board of directors — to fill a vacancy or add new talent.

The exact process depends on the Articles of Association — the company’s internal rulebook.

Example:

You start OceanWaves Ltd with 3 friends.

• The Articles say: “Directors are appointed by ordinary resolution of shareholders.”
  That means the owners vote to choose directors.
  Later, when one director leaves, the board itself may appoint a temporary replacement until the next shareholder meeting.

 Qualifications and Restrictions

Most countries don’t require directors to have any special qualifications.
But some people cannot be directors, such as:

• Anyone under 16 (in many jurisdictions)

• A disqualified director

• A person declared bankrupt

• Someone restricted by a court order or local company law

 Directors’ Remuneration

Directors are not volunteers — they’re paid for their work.
But how much and how they’re paid depends on company policy.

Typical forms of payment:

• Salary or fees (for executive directors)

• Bonuses (based on company profits or performance)

• Shares or stock options (to reward loyalty and align interests with the company’s success)

The rules for director pay are set out in:

• The Articles of Association

• Shareholder agreements

• Or approved by the board or shareholders

Example:

At GreenLeaf Foods Ltd, the two directors earn a small monthly salary but also receive 2% of annual profits as a performance bonus.
In contrast, non-executive directors might receive only a fixed yearly fee for attending meetings.

Removal of Directors

Sometimes, a company must remove a director — maybe because of poor performance, conflict of interest, or misconduct.

Under s.168 Companies Act 2006 (UK) (a principle used in many systems), shareholders can remove a director by an ordinary resolution — that means a simple majority vote (more than 50%).

 Important:

• The director must be notified in writing before the vote.

• They have the right to defend themselves and explain their case.

• Removal doesn’t automatically cancel their employment contract — they may still claim compensation if fired unfairly.

Example:

At BrightVision Media Ltd, a director starts making decisions without consulting others and causes financial loss.
The shareholders vote 6–4 to remove them.
The resolution passes, but since the director had a service contract, they may still claim contractual damages for early termination.

Removal vs Disqualification

Feature	Removal (CA 2006 s.168)	Disqualification (CDDA 1986)
Who decides	Shareholders’ vote	Court or Government (Secretary of State)
Reason	Loss of confidence, poor performance, conflict	Serious misconduct, fraud, or unfitness
Procedure	Company meeting, resolution	Legal process or voluntary undertaking
Effect	Removed from that company only	Banned from managing any company for a period
Duration	Immediate	2–15 years (depending on case)

 Powers of Directors

Directors have two main types of powers:

1. Managerial (Directorial) Powers – power to run the business day to day.

   • Hiring staff

   • Signing contracts

   • Managing budgets

   • Marketing or operations decisions

2. Shareholder (Ownership) Powers – power to decide big structural changes.

   • Changing company name

   • Merging with another business

   • Changing the Articles of Association

   • Issuing new shares

Directors control management, but shareholders control ownership.

Example:

At NovaTech Asia Ltd, the board wants to open a branch in Japan → managerial power.
But if they want to issue new shares or change company rules → needs shareholder approval.

 Balancing Power: Board vs Shareholders

A healthy company keeps balance between directors and shareholders.
If directors act beyond their powers, shareholders can challenge their decisions in court.
If shareholders abuse their power to remove directors unfairly, directors may claim damages.

Real-world tip:

Even if you own your business alone, always separate your role as director from your role as shareholder — it helps you stay professional and legally protected.

 Vocabulary Recap

Term	Meaning
Quorum	Minimum number of people needed at a meeting for decisions to be valid
Resolution	A formal decision made by shareholders or directors
Deliberation	Discussion before making a decision
Veto	The right to block or reject a decision
Ordinary Resolution	Simple majority vote (over 50%)
Special Resolution	Higher majority vote (usually 75%) for big decisions
Board of Directors	The group of people who run the company collectively
Shareholder Agreement	Contract between owners explaining their rights and responsibilities
Articles of Association	Legal document defining how a company is managed

Why This Matters for Global Entrepreneurs

Whether you’re starting a tech company in Singapore, a design studio in Milan, or an import-export business in Dubai, the same principles apply:

• Directors manage the company.

• Shareholders own it.

• The law separates their powers to protect both.

Q1: What is the primary role of company directors?

To manage the daily operations and make decisions on behalf of the company.

To own the company’s shares and automatically control all company decisions.

To replace the Articles of Association with a private agreement.

Q2: What is a de facto director?

Someone not formally appointed but who acts like a director and manages company operations.

A director who is disqualified from managing the company.

A shadow director who gives advice but has no influence over decisions.

Q3: Who can remove a director under a normal shareholder vote?

The shareholders, using an ordinary resolution (simple majority vote).

The shadow directors only, without shareholder involvement.

The board of directors can remove a shareholder acting as a director without a vote.

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