11. Directors Flashcards
When are directors caught by statutory restrictions>
Company is involved with:
- one of the directors
- one of the directors of holding company
- any person connected with the director of holding company
why must directors be held accountable?
Directors have authority to manage the company (MA 3) and delegate functions (MA 5)
Examples:
- employ individuals
- decide salaries
- enter contracts
- buy/sell prop
WIDE DELEGATED POWER MUST BE CHECKED AND REGULATED (or could lead to corrupt practices) - this is done by statute (Part 10 CA 06)
General Duties
s. 170-177 - Directors must exercise its powers in accordance with their statutory duties
(s. 172 is important)
s.172 - promote the success of the company
Range of factors to consider
- many of these already routinely considered by companies as part of good business practice following ‘enlightened shareholder value’
- s.172 is not an exhaustive list
- if conflict, advise company to consider all factors and ensure detailed board minutes to show consideration of s.172
‘enlightened shareholder value’
the “middle way” between running company to maximise shareholder interests and pluralist approach involving acting in interest of wider group of stakeholders
remedies for breach fo duty
Company has a claim against the director in law (duty is owed to the company)
s. 178 consequence of breach - same as for corresponding CL or equitable principles
- injunction
- set aside
- restoration
- damages
(Could also be grounds for termination of executive director’s service contract)
NB. EXCEPTION: S.174 statutory duties are enforceable in the same way as other FIDUCIARY duties (so remedy is usually damages)
who brings the action?
SH can bring a derivative action against the directors (for benefit of the company)
- directors are in day-to-day control and prob not inclined to cause company to bring proceedings against themselves
(in practice, SH can just remove intransigent directors and appoint more co-operative ones)
Disclosure of IDENTITY of directors and secretary
every comp must maintain a reg of both its directors and secretaries and keep register at its reg at its reg office
reg open for inspection by any member without charge (or another person for fee)
Disclosure required in notes to ANNUAL ACCOUNTS
- directors’ remuneration (salary, bonus, pension, compensation paid for loss of office)
- advances and credits and guarantees for directors by the company
- must send copy of AA to every member of the company
DISCLOSURE OF INTEREST in transactions or arrangements
if s.177 (proposed transactions/arrangements) or s.182 (existing transactions/arrangements) is satisfied
additional burden: MA 14
s.177 - interest in proposed transaction
- direct or indirect interest
- disclosed BEFORE (art. might say ‘earliest opportunity’)
- no need to make declaration if: dir not aware of interest or the transaction/arrangement, or not likely to give rise to conflict of interest, or directors know/ought to know (but do it anyway for good practice)
- if written notice rather than at meeting, notice must be sent to all directors electronically if agreed or paper
- directors can give a general notice (always interested in transaction/arrangement with X party)
DISCLOSURE does NOT ABSOLVE DIRECTOR from the need to comply with other general duties (e.g. s.177)
be pragmatic - easy to disclose so comply
s.182 – disclose interest in existing transaction or arrangement
s. 177 provisions apply equally to s.182 except:
1. disclose as soon as reasonably practicable
2. consequence = not like s.177 duty, failure is instead a criminal offence (fine)
3. applies to sole and shadow directors
interested in transaction? MA 14
Cannot vote or count in quorum for BR re: that transaction/arrangement
- unless MA 14(2), (3)
- can display with OR
- or remove permanently with SR
Disclosure of information concerning DIRECTOR’S SERVICE CONTRACTS (s.228)
at registered office
- for 1 year after after termination/expiry
- members can request copy for a fee
- non-compliance means every officer commits offence
issues that might be raised in transactions?
- General duties (esp. promote success)
- disclosure (MA14, s.172?)
- specific transaction - SPT, loan, long-term service contract
LONG TERM SERVICE CONTRACTS - general
S.188 – SH approval (by OR) may be required for any director’s service contract which is (or may be) for a guaranteed period in excess of two years (“guaranteed term”)
“Guaranteed term” - when does s.188 apply?
FROM PERSPECTIVE OF DIRECTOR - CAN THIS LAST LONGER THAN 2 YEARS?
ONE - the term continues/may continue otherwise than at the instance of the company for more than 2 years
TWO - the term cannot be terminated by the company by notice OR may only do so in specific circumstances
long term service contract - EXAM structure
- is this a guaranteed term?
- if yes - need OR
- written memorandum (setting out proposed contract incorporating the provision which relates to the term) made available to all members before resolution can be passed (for period of not less than 15 days before GM)
- GM (no point in short notice bc of 15 day inspection period)
- NB. Could get around 15 day inspection period using written resolution procedure (attach memorandum to WR)
CONSEQUENCE of breaching s.188
- provision is void to extent of the contravention
2. contract deemed to include a term entitling company to terminate it at any time by giving reasonable notice
substantial property transactions - basic def
DIRECTOR or CONNECTED PERSON
acquires a SUBSTANTIAL NON-CASH ASSET from a company (s.190(1)(a)
or
COMPANY
acquires substantial non-cash asset from a director or connected person
SPT - exam structure
ONE - define SPT (s.190(1)) going through the 3 steps (NB. NOT SPT if director entitled to it in service contract)
- Director (s.190(1)(b)) or connected person (s.252, s.253, s.254)
- non-cash asset (s.1163)?
- substantial (s.191(3))?
TWO - if SPT, need OR approval (s.190(1), s.281(3)) or be conditional on OR being obtained (if conditional - company cannot be subject to any liability for failure to obtain approval)
Connected person (s.252)
- s.253 - member of director’s family (VERTICAL IN FAM TREE - spouse/partner/CP, child/stepchild, parent)
- s.254 - company which director is associated (him and co. p. own at least 20% SC or voting power)
- trustee of a trust in which director or co. p to director have an interest
substantial? (SPT)
£5000 or below = NO
above £100,000 = YES
more than £5000, less than £100,000 = YES if worth more than 10% of company’s NAV (from most recent statutory accounts, or SC if comp only recently incorporated and no accounts)
SPT - consequences for not getting OR?
1. transaction voidable by the company (s.195) UNLESS - restitution not poss - indemnified - BFP acquired rights
(NB. SH can also affirm SPT within reasonable period by OR s.196 - if yes, cannot avoid under s.195)
- Director + person connected + any other director who authorised = liable to account for gain made directly/indirectly and indemnify company for loss
defences/exceptions to consequences of SPT
ONE:
Director not liable if Transaction is between company and person connected with director + Director concerned shows he took all reasonable steps to ensure company’s compliance with s.190
TW0:
Any connected person and director who authorised - not liable if they can show no knowledge of circumstances constituting contravention
SPT - wholly owned subsidiaries
IF WOS - no need to pass OR (but holding company must)
skeleton procedure plan for SPT
BM1
- director discloses interest (s.177(1))
- BR to convene GM and approve notice
GM
- OR approve SPT
- if short notice for GM, only need to adjourn BM1
BM2 - directors report OR passed - BR to approve purchase contract - BR to authorise signatory (Dir can't vote on these BR - MA 14(1))
s.175 - duty to avoid conflict of interest - when does it not apply?
ONE - conflict arises in relation to transaction or arrangement with the company + director (s.175(3)) (nb. other duties still apply)
TWO - situation/benefit cannot reasonably be regarded as likely to give rise to conflict
THREE - s.175: conflict authrorised by director
FOUR - if transaction requires SH approval + it is ovtained, no need to comply with s.175/6 (s.180(2))
GENERAL PROHIBITION: indemnifying directors
company cannot indemnify a director of the company or an associated company for any liability he may have incurred as a result of NEGLIGENCE, DEFAULT, BREACH OF DUTY, BREACH OF TRUST TO a company to which he is a director
any provision = void (s.232)
balance against GENERAL PROHIBITION against indemnifying
ONE - insurance for director against liability (s.232(2)(a), s.233)
TWO - provide qualifying 3P indemnity provisions
(QTPIP) AND for companies that act as trustees of occupational pension schemes, qualifying pension scheme indemnity provisions (QPSIP)
QTPIP (defined in s.234)
Company may indemnify directors against liability incurred by director to a 3P (that is not the company or associated company) - so anyone other than against company or ass company
exceptions in s.234
can incl. cost of defending + financial cost of adverse judgement (NB. Dir can still be liable to the company itself and cannot be indemnified against this)
QPSIP (S.235)
Provision that indemnifies director of a company that is a trustee of an occupational pension scheme against liability incurred re: company’s activities as a trustee
Only qualifying if certain conditions are met (s.235)
EXPENDITURE ON DEFENCE PROCEEDINGS REGARDING REGULATORY ACTIONS/INVESTIGATIONS (S.205 + s.206)
company can provide director with funds to pay expenses in defending CRIMINAL AND CIVIL PROCEEDINGS for negligence, default, breach of duty, breach of trust re: company or associated company (OR making relief apps)
BUT FUNDS MUST BE REPAID IF DIRECTOR = CONVICTED or receives adverse judgement or if app is unsuccessful
SH approval not required
INDEMNITY PROVISIONS IN ARTICLES
CA 06 = fullest extent company can indemnify its directors but companies don’t need to provide that level of indemnity (check the articles)
MA 52 - company has authority but not obligaiton to indemnify directors/former directors of it or ass companies to fullest extent permitted by CA 06
cannot go beyond scope of CA 06 but need not be to that extent
NO PROVISION CAN INDEMNIFY DIRECTOR AGAINST LIABILITY INCURRED TO its COMPANY or its ass company
disclosure of QTPIP and QSPIP
disclosed in directors report (s.236)
Copies of indemnities must be kept by the company at its registered office or at a place specified in regulations (s.1136) during their term and also for one year after they have expired/terminated
Non-compliance with s.237 is a criminal offence
SH have a right to inspect copies of QTPIP and QPSIPS (and, on payment of a fee, be provided with a copy – s.238
WAIVE FOR BREACH?
SH can forgive director for breach if inadvertent or minor (this waives personal liability re: this conduct) BUT NOT FOR ILLEGAL ACTS OR TO DEFRAUD CREDITORS
s.239 - min requirements (OR)
CANNOT COUNT DIR. OR ANY PERSON CO. AS SH in the vote
- s.252 defines connected person
- if WR: Dir/SH not eligible to vote so WR not sent to them
- if GM: maj must be achieved disregarding votes made in favour by dir or co.p but they can still count in quorum
LOANS - exam struture
- is comp plc or ltd
- what is the nature of the transaction? (type of loan, and to who?)
- prima facie - SH approval required? (depends if Ltd or Plc)
- prima facie - which company needs approval? (i.e. is there a subsidiary)
- exception?
- if SH approval required and not obtained - what sanctions are there? and for who?
- memorandum reuqired
- comply with ALL statutory duties?
loans - private company, SH approval required for:
- loans to dir or dir of holding company
- security/guarantee for direcotr
loans - public company or co. associated with plc, SH required for:
- everything private is caught for, AND
- loan to person connected with dir of comp or holding comp
- quasi-loans to dir, dir of HC, person co.
- credit transactions to dir, dir of holding comp, person co
- guarentees/security re the above
loans - if WOS
IF WOS - subsidiary no need to get SH approcal but holding company does
if subsidiary making transaction - both need SH approcal
exceptions to loans SH
- DE MINIMIS (£10,000 for loan/quasi-loan, £15,000 for credit transaction)
- ORDINARY COURSE OF BUSINESS
- expenditure on comp. business (£50,000)
- expenditure on defending proceedings
- expenditure re: regulatory action/investigation
- intra-group transactions
loans - sanctions for non-compliance
ONE - voidable unless
- restitution not poss
- indemnified
- BFP acquired rights
(NB. SH can affirm transaction with OR, if so, cannot be avoided under s.213)
TWO - account for profit/loss by dir or any dir authorised transaction
LOANS - defences to sanctions
- no knowledge (for connected person or dir who authorised)
2. took all reasonable steps (person connected with director)
loan - additional requirements
15 days, memorandum (Setting out nature of transaction and amount/purpose of loan and extent of company’s liability)
disclosure requirements in individual accounts (info about director’s benefits incl. advances/credit/guarantee)
close company
ONE - under control of
TWO - 5 or fewer participants OR any number of participants also directors
CONTROL: ability to exercise control over company’s affairs (50% of voting rights)
if 5 or fewer SH holding 50% of voting rights = close company
not a close company ig
quoted on reg. stock exchange
controlled by 1 or more non-close company (bc WOS)
taxation effect of close companies when are they caught- on LOANS
IF LOAN IN EXCESS OF £15,000
- to participator
UNLESS:
- credit in course of business
- made in ordinary course of business
- loan not exceeding £15,000 and borrower works FT for the company and no material interest (i.e. not more than 5% of ordinary SC)
taxation effect of loans on close companies
COPMANY: pay corp tax (32.5%) for loan at highest rate of income tax payable on dividends
- within 9m and 1 day after accounting period loan made
- CLAIM REFUND IF LOAN PAID, SATISFIED, WRITTEN OFF, WAIVED
PERSON: if paid back, no effect, if written off/waived, deemed to recieve dividend equal to amount of loan waived
