Excessive remuneration: Directors beware
Directors who award themselves excessive remuneration may create a shareholder claim for unfair prejudice under s994 of the Companies Act 2006.
It is not only large corporates and banks that are subject to scrutiny when it comes to director remuneration. All directors need to consider their duties when awarding themselves remuneration.
In the case of Maidment v Attwood and Others the Court of Appeal (CoA) 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, and this amounted to unfair prejudice under s994 of the Companies Act 2006.
Interestingly the judge at first instance had found that the company’s only director had awarded himself excessive remuneration, just before the company became insolvent. However this did not constitute unfair prejudice because the minority shareholder petitioning had not examined the company’s accounts which revealed such payments.
The Court of Appeal however found that the judges’ approach at first instance could be interpreted as meaning that there is a danger of minority shareholders losing their rights if they don’t read the company’s filed accounts. This is not consistent with the statutory provisions. For the full judgement please click here.
What can directors do to protect themselves when awarding 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.