Doing Business for Company but Not on Ordinary Terms

Introduction

In ‘Bowen LJ, Hutton V. West Cork Railway (1883) the Judge clearly specified that a Director is a person doing business for the company but not on ordinary terms. However, in the English dictionary a director can also be defined as someone who is in charge of an activity, department, or organization who controls, manages, or supervises. Moreover it could also be a member of a group of persons chosen to govern the affairs of an institution or corporation. As the director of a bank, insurance company, Business Company or railroad company (brainyquote.com). He also resumed that from the fact he is a Director that he has to be paid. A director is entitled to be paid only if he/she has a contractual right to payment. The contract could be in any form. Directors are often paid in terms of remuneration. In law directors ‘remuneration’ is signified as the payment received in terms of money for the job he/she has been contracted for. The payment for the remuneration might be in cash as usually preferred; or in other methods like different financial incentives such as share option. This may also include arrangements in connection with the payment of a pension, allowance, or gratuity, or any death, sickness or disability benefits, to and in respect of that director. Director remuneration is paid for the service offered to the company in tour of his duty. Payments may also be in form of any financial incentives or fringe benefits. It is essential to note, that the director is not normally be as his rights rather than in a situation he has hold his office for certain period in a contractual basis which has been agreed for a salary or package as his remuneration. Unless the director decides otherwise, directors’ remuneration accrues from day to day (companylawclub.co.uk). This was for companies registered after 1. 10. 2009, and for companies registered before 1. 10. 2009, it is stated that the directors shall be entitled to such remuneration as the company may by ordinary resolution determine and unless the resolution provides otherwise, the remuneration shall be deemed to accrue from day to day (companylawclub.co.uk).

A Director is an office and it is regarded as holder of the office as an employee to serve the company duty. The director is always the head of the organized group or administrative unit (as a bureau, school or business unit). However, a company’s article authorize that a Director is entitle to receive Remuneration as an ordinary company resolution. A Director’s remuneration can be decided in consensus of the members in a general meeting agreement, this remuneration is to be paid of his contractual salary but the board does not have any power to any individual or comminute Directors to interfere in the affair of the company. But the company board may act to delegate the provision of the constitution to allow any remuneration award to the Director as specified in case Guinness v. Saunders [1990] 2-AC 663

Therefore, Directors service contracts are to be agreed between two parties under the legal requirement that the payment provisions are fair. This practice gives both of them to involve in their decisions about their own contract as required to their guidelines which states as follows:

‘The payment remuneration to a Director should be at sufficient level to attract and motivate him to run the company to achieve success and increase the performance to keep a rate of work to meet today market of business. The remuneration is to be structured so as to link the rewards to corporate and individual performance.’ The terms of the contract may be a key area with salary which is usually determined by the board of Directors to make a contract that does not require any approval, as the constitution does not authorize the Director to vote. However, the company should advise and make it clear, that the Director salary is paid together with any other fees, and he is entitled in order to avoid any argument. The directors may be paid all travelling, hotel and other expenses properly incurred by them in connection with their attendance at meetings of directors, or committees of directors or general meetings of the holders of any class of shares; or of debentures of the company or otherwise in connection with the discharge of their duties(companylaw.co.uk).

Company Act 2006 section 189, which state that a Director contract does not require the approval by the general meeting. It should be available for any verification when required. On the other hand the new Act of the Director’s Remuneration Report Resolutions (S1 2002 -1986 – Company 2006 Act section 146) specify that a company should published Directory Remuneration Report by the accompanied with the audit report and to be shown in annual general meeting.

In amended Company Act 1985, a new schedule 7 states the availability of the Director’s Package details and the procedure of determining the director’s pay accompanied by a statement a performance and the details and performance statistic of his working rate.

A Company’s success always gives an idea of how the Director has been achieving success in terms of profit, on behalf of the Company. Therefore, the report of Director’s performance is not necessarily approved in the meeting. The Law stipulates that the company is not obliged to adhere to the wishes of the general meeting.

What is service contract? According to company Law 2006 section 227 “A service contract” is when an appointed candidate services has been required to undertake the job as the Director of the company. The services that he undertakes as the Director of the Company to perform a contractual job, and is made available by the third party, to the Company.

Section 228 of the Company Act; request that the Company should make available a copy of the service contract for inspection whenever it is required. The Company should inform in a written memorandum of the set terms of the Contract, so as any member can have a look within the term of the contract. The Company should also send or make a copy of memoranda available for inspection at Company’s registered office.

A service contract is made in order to be approved at the General Meeting which is called a guaranteed period of two years under the company Act 2006 section 189. The Contract made to be complied and the company cannot terminate the employment unless in one specified circumstances by a written resolution approved by shareholders as referred in case Atlas Wright (Europe) Limited v. Wright (1999) BCC 163.

However, a service contract can be extended by the company before the current contract for another two years period maximum together, with a revised remuneration to be added in the service contract of the Director. Any breach of contract will render the offending provision of the contract void, and the company may terminate the contract at any time given the reasonable notice.

The Company should bear in mind that practice of increasing directors’ pay shortly before retirement, and thereby significantly increasing their entitlement under a company’s final salary scheme carries risks. It could be deemed to be against the company’s best interests. The Combined Code provides that:

“The remuneration committee should consider the pension consequences and associated costs to the company of basic salary increases and other changes in pensionable remuneration, especially for directors close to retirement.”

“The remuneration of Directors does not depend on a profit having made, and the amount paid to Directors does not have to be reasonable.’

Macintyre, “Business Law” (5th ed.,2010)

Discuss the business ethics of making large payment to directors where a company has made a loss. (40 marks)

A Director holding an office is entitled a salary and receiving remuneration. “ The remuneration paid does not depend on a profit having made, and the amount paid to Directors does not have to be reasonable” McIntyre, Business Law, the theory might reason that paying a Director is regarded as ethical because a Director is an employee and is entitle for a payment of remuneration.

‘Ethics” can be define as ‘the principles of conduct governing an individual or a group’ and ethics is ‘the study of morality’- defined as the standards that an individual or a group has about what is right and wrong, or good and evil. How much a Director of a Company can be paid for the job he is doing? Presently, bank Directors are receiving huge amount of remuneration in their pay out as their bonus. Company Directors like Tierrry Falque-Pierrotin of Kesa Electrical, received a total payment of 2.1 million pounds and Marin Morgan and Daily Mail General Trust received a sum of 1.2 million pounds. These seven figures payout looks excessive especially when the financial market has gone under recession. It is not ethical that big summer bonuses are paid into such considerable amounts, but there might be companies that are struggling, and is experiencing net loss, but the Directors are receiving their remuneration whether loss or profit. It is fairly acceptable when the company is making huge profit. Mr. Andy McKeon Managing Director of Head at Audit Commission, is about to receive a pension pot of 1.6 million pounds as his pension. It is unacceptable our National Health Service is struggling to adjust the budget for the financial year. Thus, it unethical that huge sum of money is to be paid when the organisation is not producing the performance. It is there this has outraged the MPs and one of the Member of Parliament Mr. Gavin Barwell, state that “we urgently need to look at public sector pensions to make them fair and sustainable, both to the tax payer and to people who devote their life in public sector. Top earners are among the first to receive their payout and those in middle sector are always to suffer” (Daily Express, Thursday 10.03.2011).

Today World economy has been struck by recession and many organisation has been affected and closed down although steps has been undertaken to improve some key sector like manufacturing, it’s not working accordingly. However, financial organisation like Barclays Bank paying six and a half million pound in term of bonus to new chief executive ( M. Bob Diamond)- Evening Standard, 7th March 2011, give us an idea how profitable organisation actually share their profit. Bonus has been paid to chief executive, but do they follow the laws or rules regarding payment of bonus? There are other big company like HSBC, Abbey, Natwest, Lloyd TSB are announcing huge profit and ‘big boss’ meaning Directors are having big shares in term of bonus payment. In view of public eyes, this is regarded as unethical and it is totally unfair there is a huge gap in paying of bonus to Directors, whereas other employees are receiving very little in bonus or nothing at all.

However, on the other hand, a Director’s job is regarded of big responsibility and dealing with turnover of billions of pound. A Director has to be competent, he is the one who promote success and maximize profit to achieve organisation target. If a Director is working so hard for the company to achieve the goal, and has built success for a brand name in the market, it is worth to compensate in term of remuneration and bonuses. It might be that the organisation is making millions of profit therefore paying a bonus of £200 000, is just like taking a jug of water from the ocean.

In business market organisation is tend to become world leaders of the market and stay in the top level. These companies tend to attract the best of the best by high salary, benefit, remuneration, bonus, and retirement pension. Best Director has to be highly paid ,chief executive of Daily Mail & General Trust Martin Morgan was paid the substantial amount of £ 324 971.00 and just showed us that the top company has the top management team to lead in the market. Money reward has always attracted the best candidate to perform the job but paying high salary to a Director is simply to keep him/her in the company. It also give motivation, self respect, fame, measure the success and also to achieve personal goals.

An organisation might be in loss in term of profit may be due to recession, new competitor, change in market taste or any other unfortunate circumstances but it shows that is loyal of paying an employee in term of remuneration and does not harm the organisation to re-organize the team and help it to achieve the coming target. In French, jargon is called ‘ reculer pour mieux sauter’- meaning losing to win. Therefore, believing keeping the Director for organisation will probably be a risk as in business decision making, is to take risk that will probably lead to overcome the loss incurred by the company. Most people believe that entrepreneurs learn from failure. But according to USA Today, Entrepreneur, or any of a multitude of popular publications and you will find stories about how entrepreneurs learned from their mistakes to become successful the next time around.

Using examples of Apple’s failure with the Newton, Frederick Smith’s low grade on the Fed Ex business plan, and Bill Gates’ unsuccessful first computer business, many authors argue that entrepreneurial failure is no obstacle to later success. Successful entrepreneurs do better the second time around is easy. They might simply be better at creating new companies than those who have never done it before or failed their first time around. However, many business fail but failure does mean we have to stop there but instead we need to try again and learn from where it has not been able to work.

Therefore, a fail business does not mean that will never grow again. But it is true that if we have someone work for an organisation does not need to get paid but instead give him another chance to emerge and show his skill and work.