This is a new section. At present directors may decide at a board meeting that a company should make a payment to one or more of its members by way of compensation for loss of office, or as consideration for retirement from office. It is undesirable that directors should have a free hand. The purpose of this section is to provide that the approval of the company must first of all be obtained in order to do this.
SECTION 186.
Question proposed : " That Section 186 stand part of the Bill."
The only question arising is that in the case of a director who is also, say, a manager and is losing his job as manager, so to speak, you cannot differentiate between these two cases.
We do in Section 189, subsection (3). We declare, with reference to payments in these sections—Sections 186, 187 and 188—that they do not include any bona fide payments by way of damages for breach of contract or by way of pension schemes.
Take this particular case. Let us suppose as can happen, that a director or, what is more commonly the case, some officer of the company who becomes a director still holds the office that he has in the company—say a manager. He may have a contract of employment as manager and he becomes a director. At a later stage, because of resignation or any other cause, his contract is determined in the ordinary course of events, which would be subject to notice. Does a payment in that case come within the section or can the contractual law operate ?
If it is a bona fide payment by way of damages for breach of contract, then he would not have to come to the company for approval under Section 186. It would only be in respect of his fees as director, if they could be distinguishable.
Would payment in lieu of notice come under the heading of damages ?
I would say so, depending on the terms of his contract with them. I think the Deputy understands the idea behind this.
I do.
This would mean that if a director had a contract of employment as managing director it would first have to be approved by a general meeting. It could not be implemented except by a general meeting.
If he were being removed from office and there was a question of the application of Section 186 then if some payment was to be made to him on retirement from office you would have to look at subsection (3) of Section 189 which says:
" do not include any bona fide payment by way of damages for breach of contract ”.
In that case you would not have to get the approval of the company for payment of compensation to him.
Do you have to get the approval of the original contract of employment ?
No, that would be covered by the Articles.
Suppose that where the Board of Directors decides to terminate his contract before the expiration of 10 or 15 years on payment of a certain amount of damages for his loss of office, if there was such a provision in the contract of employment. Would they have to have prior approval ?
The approval of the appointment of these people is generally covered by the Articles.
Their remuneration would not be covered by the Articles ?
I think there is a general equitable principle that anything which would be utterly unreasonable in the contract would be subject to challenge. If it was not bona fide for a proper corporate purpose, then it could be challenged and the director would be accountable to the company. I think that principle is there for very many years and it is something which directors are well aware of.
I think the principle can be put in this way. The fees for office of director are fixed at the annual general meeting in accordance with the proceedings of the company. If that director combines with his office of director the office of manager, which is essentially that of managing director, as mentioned by the Chairman, that is a separate contract of service and it was not necessary heretofore that that would be specifically dealt with at every annual meeting.
Or at any general meeting.
Therefore, it is a thing that had to be fixed in law heretofore. As a matter of fact, can what is an appropriate contract by the company and what is remuneration for services rendered be decided at the general meeting ? In other words, what can the directors decide ?
The directors can agree on the amount. It is a well-established fact that you cannot appoint a managing director unless there is power to do so in the Articles of the company. You cannot appoint a managing director and delegate functions to him unless it is provided for in the Articles.
Question put and agreed to.