Waiver of directors’ personal liability
It may be that, even though a director has not acted in compliance with his duties to the company, the shareholders are willing to forgive him for the breach. This often occurs when the breach was inadvertent or minor. As you are aware already, if a director acts negligently or in breach of duty or trust in relation to the company he will incur personal liability. However, the shareholders of a company have the option to forgive conduct by a director amounting to negligence, default, or breach of duty or trust with the
consequence that the director’s personal liability in respect of that conduct will be waived.
This ratification of a director’s conduct was dealt with under the common law, until the introduction of s.239 CA 2006 which put ratification on a statutory footing. Section 239 CA 2006 sets out the minimum requirements which must be met for a ratification to be effective. It applies to former directors and shadow directors, as well as to current directors. Although s.239 CA 2006 is very much based on the common law requirements, it also introduces more restrictive elements.
Shareholder approval required
Unless the company’s articles require a higher majority (or unanimity), an ordinary resolution must be passed in order to ratify conduct by a director amounting to negligence, default, or breach of duty or trust (s.239(2) CA 2006). However, it is important to note that in obtaining the required level of approval, any votes which the director and any person connected to him may have as shareholders of the company cannot be taken into consideration. This introduces a significant restriction on ratification which did not exist under common law. The intention behind it is to prevent those who may gain a personal advantage from the ratification from voting – it is not appropriate for those that have done wrong, or those connected to them, to be able to vote to waive their own liability.
“Connected persons” is defined in s.252 CA 2006 and includes, amongst others, the spouse, children and parents of a director (s.253 CA 2006) as well as companies with which the director is connected. Notably “connected persons” for these purposes may also include a director’s fellow directors if they satisfy one of the other requirements in the connected person definition (s.239(5)(d) CA 2006).
As a result of this new restriction:
- if the ratification is proposed as a written resolution, as the director and any shareholders connected to him are not eligible to take part (s.239(3) CA 2006), the resolution need not be sent to them and they are not taken into account in determining whether the requisite majority has been achieved to pass the resolution; and
- if the resolution to ratify is proposed at a meeting, the necessary majority must be achieved disregarding any votes in favour made by the director and any members connected to him (s.239(4) CA 2006). The director and connected member can, however, still attend, count in the quorum and take part in the proceedings at a meeting where such a resolution is proposed.
Section 239(6) CA 2006, however, does clarify that nothing in s.239 CA 2006 affects the validity of a decision taken by unanimous consent of the shareholders. Therefore, when such consent has been obtained, the restrictions on who can vote will not apply.
Overall, these statutory provisions will make it harder for companies to ratify a director’s conduct, particularly in small family companies where the directors often hold the majority of the shares and are related.
Other requirements for valid ratification
Section 239(7) CA 2006 makes it clear that the requirements set out in s.239 CA 2006 are in addition to, rather than an alternative to, any other requirements that statute or common law may impose for ratification to be valid. It states that s.239 CA 2006 does not affect:
- any statute or rule of law imposing additional requirements to those set out in s.239 CA 2006; and
- any rule of law as to acts that are incapable of being ratified by the company.
So, for example, it is still not possible for illegal acts or acts which defraud creditors to be ratified.