What Kinds Of Financial Arrangement Can A Company Enter With Its Directors? | Independent Newspapers Limited
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What Kinds Of Financial Arrangement Can A Company Enter With Its Directors?

Posted: Jun 18, 2015 at 12:08 am   /   by   /   comments (0)

Remuneration of Directors

Since directors as such are not servants of the company, they have no entitlement to remunerations for their services unless the articles of the company include an appropriate provision that the directors are entitled to such remuneration as is decided by the general meeting. A director who receives remuneration is not entitled to recover expense connected with travel to, and the attendance of board meeting unless this is provided for by the articles.

In family businesses, it is not uncommon for relatives, especially spouse, to be accorded the title ‘director’ even though no active participation in management is expected from such individuals. The courts have asserted the validity of an article providing the company power to determine and pay remuneration for the mere assumption of the post of director since the “mere holding of office involves responsibility even in the absence of any substantial activity” and there was nothing to prevent the shareholders, in accordance with such an article from paying a reward attributed to the mere holding of the office of director, for being as it were, a name on the  note paper and attending such meeting or signing such documents as are from time to time required.

Apart from the provisions in the articles, a director may have an express services agreement with the company providing for remuneration. If such a contract proves to be invalid, for example because a managing director has failed to take up the contract on a quantum meruit in respect of services actually rendered to the company. Even in the absence of an express contract, a contract may be inferred from the conduct of the parties incorporating an article providing for remuneration where it can be shown that the director has accepted office on the basis of its terms.

When the shareholders of a company have honestly determined the amount of remuneration to be paid, the court will not subject that remuneration to an objective test of bona fides for the benefit of the company. The sums paid must, however, constitute genuine remuneration and there comes a point where the court will hold that the payments are so out of proportion to the value of holding office as a director as to constitute disguised dividends out of capital.

Companies and Allied Matters Act (“CAMA”) prohibits the payment by a company to a director (whether as director or otherwise) of remuneration free of income tax, or otherwise calculated by reference to or varying with the amount of his income tax, or to or with the rate or standard rate of income tax except under a contract which was in force at the commencement of CAMA, and which provides expressly for payment or remuneration in that form.

Though a company is not bound to pay remuneration to directors, but where the company agrees to pay, the directors must pay such remuneration out of the funds of the company, and such payment is apportionable. The amount of agreed remuneration is a debt from the company so that if the directors take office on the footing of the articles, they are entitled to sue the company for the debt or proof in the liquidation. If a director receives more than he is entitled, he is guilty of misfeasance and is accountable for the money so received.

It is unlawful for a company to make to any director of the company any payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office unless particulars, with respect to the proposed payment and the amount, have been disclosed to members and the proposal is approved by the company. Disclosure must be made to all members. If a director receives payment in contravention of this provision, the amount received will be deemed to have been received by him in trust for the company. Payments prohibited under this head do not include any bona fide payment by way of damages for breach of contract or by way of pension.


Loans to directors

The rules relating to loans to directors and also applying equally to shadow directors are contained in CAMA. CAMA provides a more permissive code for the private than the public companies, though if the private company is part of a group containing a public company, it is subject to the strict rules applicable to public companies.

The basic prohibition, applying to all companies is that a company may not make a loan to a director of the company or its holding company or enter into a guarantee or provide security in relation to a loan made by another to such a director. There are, however, a number of exceptions and the following transaction, in particular, may be entered into by all companies.

• Anything done by the company to provide the director with the funds to meet expenditure incurred or to be incurred by him for the purpose of the company or for the purpose of enabling him properly to perform his duties as an officer of the company;

• In the case of a company whose ordinary business includes the lending of money or the giving of guarantees in connection with loans made by other persons, anything done by the company in the ordinary course of that business.

CAMA prohibits a company from entering into certain property arrangements with a director of the company or a person connected with him unless the arrangements are first approved by the resolution of the company in general meeting, and if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution in general meeting of the holding company. he is