Excessive director remuneration
Publicity of directors of PLCs and banks who over pay themselves are well publicised. However, directors of private companies receiving excessive remuneration are not immune from challenge. There is established authority for private company shareholders to challenge private company director excessive remuneration as we explain using a relevant case.
Excessive remuneration had to be paid back to the company
In the case of Maidment v Attwood and Others the Court held that the company’s only director had breached his duties as a director by setting his salary in accordance with his own interests, in contrast to his duty as a director. The court found that excessive remuneration amounted to unfair prejudicial treatment to minority shareholders. There had been no regard to the ability of the company to pay the remuneration voted. The director paid himself more than that paid to any other member of staff. Unfair prejudice is a claim the minority shareholders can bring in court under s994 of the Companies Act 2006. The director was ordered to pay remuneration back to the company.
Interestingly, the fact that the director’s salary was disclosed in the annual accounts and the shareholders could have spotted the payments earlier was found by the court not to be a barrier to unfair prejudice.
Apart from excessive remuneration paid to a director the court found there was a breach of duty when the director allowed the trading name to be used by another company with whom he was connected without payment. And, there was a further breach when the director sold the goodwill and trading name shortly before the liquidation of the company for minimal consideration.
Insolvency can complicate an unfair prejudice claim because shares in an insolvent company are valueless unless the value of any claims which the company has against the directors will eliminate the deficiency and produce a surplus for shareholders. In this case the shareholders were successful in establishing that the shares would have had value but for the wrong doing of the director. The court will take a wide view of prejudice suffered by a shareholder.
What does unfair prejudice mean in practice
For the full judgement please click here.
What can directors do to protect themselves against claims they are paid too much remuneration?
Where it is practical, we would recommend that companies appoint a non-executive director, or even a remuneration committee, to assess remuneration of directors and provide an impartial assessment of any proposed director remuneration.
Where this isn’t practical, we would recommend that companies with minority shareholders ensure that there is more than one director appointed. The directors can then approve each other’s remuneration whilst considering their duty to act in the best interest of the company as a whole.
The directors must ensure that they are able to justify their remuneration and in doing so consider the duties of directors set out in the Companies Act 2006.