Section 171 of England formation

A Director:

A director of an England formation doesn’t just open a Ltd company in the UK online but is also a person who is responsible for the proper functioning and management of some particular area of a company for a day to day basis. The number of Directors in a company vary according to the needs of the company. The person who has to act as a Director has a number of responsibilities which must be fulfilled and some constraints which must be followed.  These are important to be aware of before you open your Ltd company in the UK via online or otherwise.

Section 171:

Under the jurisdiction of this section of law, the Director is liable for the exercise of the powers as follows:

  • The powers must be practiced in accordance with the constitution of UK. The Director must be responsible for the use of these powers staying in the constraints applied by the constitution.
  • The purpose for which the powers are acquired by the Director must be kept into consideration while the said power is practiced.

The Director breaches the duties falling under this section if:

  • He acts outside his powers. That is, if he takes any action which doesn’t fall under his legal authority. Or if he takes any action which has not been approved by a quorate board beforehand.
  • He uses his power for improper purposes which fall in the category of his own personal interests.

The breach in accordance with the improper use of power is further explained in the sub-categories of External and Internal powers.

External Powers:

The use of powers in relation to third parties is considered as the improper use of external powers. The test for the checking of breach in this regard is objective and not subjective. So, the director is to be held liable whether there was a good will behind the improper use of power.

Nominee or Special Interest directors are sometimes appointed for the representation of the interests of a particular group or a shareholder. This acting director cannot simply act as the representative of the assigned party and also has an overriding duty to serve in the interest of the board in question. This acting director also has the lenience of acting on his powers as long as they are consistent with the overriding duty.

Internal Powers:

The use of powers of a director which affects the rights of the shareholders of the company is the improper use of Internal powers. This use is often held more accountable by the courts than the improper use of external powers. Whether the power is properly used by the director depends upon the purpose for which the power was acquired. If the purpose of use of this power conflicts with the original purpose, the use is considered improper.

Tests for Improper Use of Power:

Three types of tests are usually employed to determine whether the power was improperly used.

  • Objective test – doesn’t take into consideration the good will of the director
  • Subjective test – takes into consideration the good will of the director
  • Intermediate test – it is the test which is best viewed in the eyes of the court. In this test the director is subjected to both objective and subjective tests to determine whether the use of power is justified. The court also takes into account the fair use f power between all the shareholders if the breach has affected the shareholders. If the directors use the power in order to defeat or promote a takeover, this use is rendered improper and consequences are to be faced.

The director cannot use his power of issuance of shares for raising the capital to deprive a people of majority or to create a new majority. Under such condition too, the factor that the power is used fairly between the shareholders is kept into consideration. Hence, the director is liable for the unfair use of his powers under any circumstances.

Nature of Duty:

According to Section 171, the director owes his duty to the company and not the shareholders, except for certain circumstances. Thus, the members cannot take any action against the alleged director even if the breach has deprived the members of their right to vote. However, if the power is improperly used for the allotment of shares, it is an infringement of the contractual rights of the members. So, in such a case, the members have a personal right of action against the said director.

Consequences of Breach:

In case of breach of the duties by a director, the director must face the consequences of his actions and the company is entitled to act against the director or the people involved.

In the instance of violation of external powers, where the director lacks actual authority, any and all contracts signed under the influence of this illegal power are considered null and void.

In the instance of internal breach, where the director uses his power for illegal allotment of shares for improper purposes, the allotment is voidable and can be set aside by the shareholders.

The remedies in case of any such breach are given in detail below.

Remedies for Breach of Test:

In the circumstance of breach of one or more duties which fall under Section 171, the company is entitled to take action for the remedy of the loss resulting from the breach.

  • Liability of Directors:
  • Remedies are available to the company for the purpose of compensation of loss resulting from the infringement of duties. These remedies include:
  • Equitable compensation – the directors are held accountable for any and all loss to the company resulting from their actions. If more than one director is involved, the liability is joint and several. Under this law, the directors must compensate the loss to the company occurring from their actions.
  • Recovery of Property – Misapplied company property can be recovered from anyone who holds it illegally, without any defence. This property, if intact, can be recovered by restitution. If it has been converted to another form, it can be recovered by tracing the assets which are made by selling the company property. The property of a company is treated as a trust fund, so, when recovered this way, it will be a subject to constructive trust.
  • Accounts of Profits made by the Director – the company is entitled to look for breach by going through the accounts of the alleged director.
  • Rescission of Contract – in case of a breach, the contracts made with the director are deemed void.
  • Accessory Liability:
  • The third parties which are allies in the infringement will be held accountable for the dishonest assistance of the director’s breach and for knowing the receipt of the company’s property.
  • Unauthorised Remuneration:
  • The directors are usually entitled to a set salary from the company under the contract of employment. However, where no such rights exist, the director must account for unauthorized remuneration, held on constructive trust for the company.

So as you can see, before going ahead with the easy part, which is to actually open your Ltd company in the UK via online, it would be wise to research as much as possible with regards section 171.



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