Bristol Solicitors

What are the points to note on Director Service Contracts ?

“Directors’ Service Contracts” specify the terms of a director’s responsibilities, duties and relationship with a company. It is defined in section 227 of the Companies Act 2006 as a “contract under which:

(a) a director of the company undertakes personally to perform services (as director or otherwise) for the company, or for a subsidiary of the company, or

(b) services (as director or otherwise) that a director of the company undertakes personally to perform are made available by a third party to the company, or to a subsidiary of the company.”

The service contract must contain elements of the duties laid down by the Companies Act 2006. In order to comply with these duties, the director should not be involved in negotiating the contract or remuneration. Also, it is important to include normal employment terms relating to:

•             Appointment

•             The Term and Termination of Employment

•             Pay, pension and holiday entitlement

•             Intellectual Property

•             Reconstruction and Incorporation

When can a director be held personally liable?

If a company goes into insolvency procedure, conduct of the directors and the company’s transactions would generally be considered going back 3 years.

Directors may be held personally liable and be ordered to pay money to the company for the benefit of its creditors under several circumstances :-

• Wrongful Trading – continuing to trade or enter into contracts after the director or shadow director, knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. If a court considers there has been wrongfully trading, it can order a contribution to the company without financial limit and disqualify a person from acting as a director for up to 15 years.
• Fraudulent Trading – carrying on a business with the intention to defraud creditors or  other fraudulent purpose. Examples might be taking deposits for orders which will not be fulfilled, or giving wrong or inaccurate information to obtain credit or contracts. If a court considers there has been fraudulent trading, it can a contribution to the company without financial limit and it can result in going to prison you for up to 7 years.
• Personal guarantees – Personal guarantees may have been given by directors to obtain credit for the company. Most guarantees are on a “joint and several liability” basis, which means that there is no requirement for the lender to pursue the company in preference to the individual.
• Misfeasance - This is a breach of fiduciary duties of care legally owed to the company as a director. Examples are taking out money wrongly from the company or using company money for matters not associated with company business. If a court considers there has been  misfeasance, it can order the director to make a contribution to the company without financial limit.
• Preferences – relates to an advantage given to one creditor in preference to another which is unlawful as creditors must be treated equally (subject to there being a difference between secured and unsecured creditors). The penalties for this include setting aside the transaction, and ordering the beneficiary of the preference to refund  the company.
• Transactions at an undervalue – where a company has allegedly transferred assets for significantly less than their market value. The sanction may be to set aside the transaction and for the recipient to refund money or return assets to the company.

What is the usual structure of a contract ?

• Date of agreement
• Which periods the agreement would apply
• The names of the two parties
• Recital outlining the background to a clause
• The operative part of the contract consisting of the main elements of the contract
• Schedules listing relevant matters
• Statement that the contract will proceed on the terms agreed and a signature indicating their understanding.

How to create a contract

The most basic elements are an offer which is accepted by another and for both to have an intention to be legally bound which is normally indicated by a signature on a written contract.

Be aware of certain elements:

• There should be a date specifying when the offer will expire.
• Ability to cancel the contract. A clause should specify which party can cancel the contract and on what terms. Care must be taken to restrict the scope of this clause to ensure the promises of each party are definable and not too wide. If they are considered too wide the contract will be rendered void and therefore unenforceable by law.
• Variation. If one party agrees outside the terms of the contract to do something more than what was initially agreed, the contract will only be enforceable if the other party provides something more to make the contract proportionate.
• Waiver. A doctrine of waiver means that a contract is no longer enforceable after a specified time. Typical consumer contracts require delivery of goods within 28 days otherwise and after this time the contract will be rendered unenforceable.
• Promissory estoppel. The law here is not always predictable. This doctrine is known to overlap with the doctrine of waiver. Where the doctrine of waiver disallows, say, the recovery of a sum of money, the doctrine of estoppel steps in if the court considers this to be unfair. This allows a defence against the automatic doctrine of waiver to ensure the original terms of the contract might still be enforceable.

Are shareholders free to transfer or sell their shares to someone else?

• A company’s articles of association commonly allow the directors to refuse to register any transfer of a share submitted to the company.
• However, they may include other, different restrictions on the transfer of shares. For example, they might require any shareholder who wants to sell shares to offer them to existing shareholders first, which is known as pre-emption, or to offer them back to the company through a share buy-back. The articles might also establish how the price for the shares is to be calculated in each case.
• Alternatively, they might provide that shares can be transferred freely between members of the same family, but any other transfers are subject to the usual directors’ powers to refuse to register a transfer, or to pre-emption rights in favour of existing members or the company (with a mechanism for establishing the price to be paid for the shares) mentioned above.

Can shareholders make a decision without a meeting ?

Subject to certain exceptions, shareholders of a private company can make a decision using a written resolution instead of holding a shareholders’ meeting. They must follow the procedure in the Companies Act 2006. The exceptions are resolutions to remove a director or an auditor from office. These must be passed at meetings because the Companies Act gives the director or auditor the right to state, at a meeting, why they should not be removed. There are also special rules governing the notice to be given of the meeting. The company must send  a copy of the proposed resolution to every shareholder (and to the auditor, if any) together with a statement telling the shareholders how to indicate their agreement to the resolution and the date by which it will lapse if not agreed to by then.

What percentage of votes are needed for a written resolution ?

If the written resolution put to the shareholders is an ordinary resolution the percentage vote required is a simple majority of the total voting rights of the shareholders. For a special resolution it is not less than 75 per cent of the total voting rights of the shareholders. The percentages required to pass resolutions in writing are percentages of the total voting rights whereas, for meetings, they are percentages of the votes cast at the meeting. This can mean putting a decision to shareholders as a written resolution can result in a different outcome compared to the same resolution put to shareholders at a meeting, as votes of shareholders who are not at, or represented at, or who do not vote at, a meeting, are not counted.

What is an exemption clause?

If you enter into a legally valid and binding contract, it is common to find clauses in the contract which determine the outcome of a breach of the contract by either one party or both, typically by seeking to restrict that liability.  These clauses are known as exemption clauses.

Main types of exemption clauses

Exclusion – they are inserted into the contract to cut down or cut out altogether the duties of the party in breach.  An example of an exclusion clause is where a purchaser is responsible for accepting goods from a supplier, even if there are defects and faults.

Limitation – they are included in the contract to define the rights of innocent party in the event of a breach of the contract, and may commonly govern whether your right to sue in a particular situation exists and how much you are entitled to recover.

A party can attempt to restrict liability even where the breach is caused by the negligence of the party in default. However, for such clause to be enforced, the term needs to have been sufficiently communicated to the injured party before the formation of the contract. Further, it needs to be construed in such a way to show that the parties intended, in the context of their agreement that the exclusion is to be valid. And even then, very high legal barriers  are applied, where the clause purports to absolve the party of altogether liability for negligence.

In practice, one of the most common uses of exemption clause is to limit the amount payable for damages resulting from a breach. If the clause is held valid then irrespective of whether the loss

When dealing with business-consumer contract all those clauses would be subject to the reasonableness test in section 11 of UCTA 1977. Therefore, for their validity to be upheld in court so that the defaulting party can rely upon them, they need to prove that the term is in fact reasonable and it extends so far as to cover the relevant breach.

We hope you found what you wanted on this page, but please do check out the main business law page and/or our commercial law blog.