2.1): Directors

Question 1

What are the requirements for directors?

Answer 1

all companies must have at least one director

public companies must have 2 directors

directors do not have to be human beings but at least one director must be a person aged 16 or older

if one or more directors are corporate directors then the company will send an individual to board meetings

Question 2

What does the board of directors have the power to do in terms of directors?

Answer 2

decide what services the directors may undertake

decided remuneration and benefits for directors

Question 3

What are executive directors?

Answer 3

they have been appointed to board of directors

they have an employment contract with the company

Question 4

what are non-executive directors?

Answer 4

appointed to the board and registered at companies house

no service contracts with the company

no salary but will receive fees for attending board meetings

Question 5

How is a chairperson appointed?

Answer 5

director appointed to do this

by board resolution

Question 6

What is a de facto director?

Answer 6

person who acts as a director even though they have never been appointed or validly appointed

Question 7

what is a shadow director?

Answer 7

person in accordance with whose directions the directors are accustomed to act

AND

has not been validly appointed as a director

Question 8

How can directors be appointed?

Answer 8

by the board or by ordinary resolution of the shareholders

board resolution is the quickest way

Question 9

When can a director NOT take office?

Answer 9

if they are disqualified from doing so

Question 10

When will a director automatically cease to be a director?

Answer 10

if bankruptcy order is made against them

if a doctor gives a written opinion that they have become physically or mentally incapable of acting as a director and will remain so for more than 3 months

Question 11

what are the administrative requirements after appointing a new director?

Answer 11

notify Companies House within 14 days of appointment

FILE:

AP01 Form for Individuals

AP02 Form for corporate director

enter director and their address on register

Question 12

Explain Directors’ Authority?

Answer 12

directors act on behalf of company as agents with company as principal

they have actual and apparent authority to bind the company to contracts

Question 13

explain actual authority for directors?

Answer 13

express: given directly through service contract or board approval

implied: Arises from past conduct where the director acted similarly without objection from the board

Question 14

what is apparent authority?

Answer 14

director acts without prior consent but the company is estopped from denying authority

Based on the company’s representation (by words or conduct) that the director is authorised

It’s the company’s actions or omissions that matter, not the director’s actions

Question 15

explain directors’ liability?

Answer 15

If a director lacks actual or apparent authority, they are personally liable to the third party, and the company is not bound by the contract.

Question 16

What is the procedure for service contracts for directors?

Answer 16

the board has power to award service contracts not exceeding a guaranteed term of 2 years

Question 17

what must be done to approve a long term service contract?

Answer 17

approval by ordinary resolution of shareholders needed

Question 18

What is a possible issue for directors when approving a service contract?

Answer 18

In a two-director company, a director cannot vote or count in quorum when approving their own service contract due to personal interest

Question 19

What are the solutions available to overcome approval issues for service contracts?

Answer 19

Permanent change to articles by special resolution which may allow a director to vote when they have a personal interest

AND

Temporary suspension of MA 14 by ordinary resolution

Question 20

What is the process for approving a long term service contract?

Answer 20

ordinary resolution at GM or by written resolution

copy of memorandum with proposed service contract kept at registered office for 15 days prior to GM and at the GM

if done by written resolution, this along with memorandum and service contract must be circulated

Question 21

What would happen if the company enters into a long term service contract without the approval of the shareholders?

Answer 21

the guaranteed term element is void

rest of contract is enforceable

contract can be terminated with reasonable notice

Question 22

What are the filing requirements for resignation of a director?

Answer 22

Director must file form TM01 (individual) or TM02 (company) at Companies House within 14 days of resignation

if contract has power of attorney clause: the company can file TM01 on the director’s behalf

Question 23

What are the rules on dismissal of a director?

Answer 23

Directors contract and office are separate

dismissal does not terminate the contract unless:

contract allows termination

OR

director is in repudiatory breach and can be summarily dismissed

dismissal does not automatically remove director from office.

Question 24

How can a director be removed?

Answer 24

1. by ordinary resolution at a GM
2. special notice to company is required
3. once special notice received, company notifies director immediately
4. company notifies shareholders with GM notice or at least 14 days before GM
5. director in question is entitled to speak at GM

Question 25

What is meant by special notice?

Answer 25

28 days notice before general meeting is required

Question 26

What is a Bushell v Faith Clause?

Answer 26

gives someone who is both shareholder and director greater voting rights as a shareholder if resolution in question is one to remove that person as a director

Question 27

What can be included to safeguard against removal of a shareholder as director?

Answer 27

provision in shareholder's agreement preventing voting in favour of removal of a shareholder from office as director the dismissed would have a claim for breach of shareholder's agreement if a party to the agreement voted against them

Question 28

What are the notification requirements for companies?

Answer 28

1. must keep a register of directors 2. must keep a register of directors' residential addresses 3. Forms CH01 and CH02 used to notify a change in particulars for natural persons and corporate directors 4. Forms AP01 and AP02 used to notify CH of appointment of directors 5. File TM01 (human directors) or TM02 (corporate directors) within 14 days of resignation/removal

Question 29

To whom are directors' duties owed?

Answer 29

to the company itself not to shareholders or creditors

Question 30

When a claim is made against a director for breach of duty, who will the claimant be?

Answer 30

the company itself

Question 31

What are the directors' fiduciary duties?

Answer 31

duty to act within powers duty to promote the success of the company duty to exercise independent judgment duty to exercise reasonable care, skill and diligence duty to avoid conflicts of interest duty to not accept benefits from third parties duty to declare interest in proposed transaction or arrangement

Question 32

what will the court apply when judging whether a director has breached their duty to promote the success of the company?

Answer 32

subjective test director will not be in breach if they, in good faith, believed they were carrying out their duty here

Question 33

What is meant by the duty to exercise reasonable care, skill and diligence?

Answer 33

objective test: The level of care, skill, and experience reasonably expected of someone performing the director’s role subjective test: The level of care, skill, and experience that the particular director has.

Question 34

What is important to remember when considering the duty to avoid conflicts of interest for directors?

Answer 34

the fact the company has or has not taken advantage of the property, information or opportunity is irrelevant

Question 35

when does the duty to avoid conflict of interest not apply?

Answer 35

doesn't apply to a conflict arising in relation to a transaction or arrangement WITH the company the duty arises only in relation to a contract in which the company is NOT involved duty is not infringed if directors have authorised the matter

Question 36

what can protect a director from a claim for breach of duty to avoid conflicts of interest?

Answer 36

board resolution authorising brach or potential breach Note: director in question will not count in quorum for vote to authorise the breach if the director in question votes, their vote will not be counted

Question 37

When is there no breach of the duty to not accept benefits from third parties?

Answer 37

if the acceptance of the benefit cannot reasonably be regarded as giving rise to a conflict of interest.

Question 38

s 177: What are directors required to do if they have an interest in a proposed transaction or arrangement?

Answer 38

Directors must declare the nature and extent of any direct or indirect interest in a proposed transaction or arrangement before the company enters into it. Declaration can be made: At a board meeting, OR In writing via general notice.

Question 39

s 177: What are the exceptions to the duty to declare interest in proposed transaction or arrangement?

Answer 39

The director is unaware of the interest or transaction (director is treated as having reasonable awareness) The interest is unlikely to cause a conflict. The other directors are already aware or ought reasonably to be aware. It relates to the director’s service contract.

Question 40

s 177: What is important to remember when considering whether the duty to declare an interest in a proposed transaction or arrangement has been breached?

Answer 40

DOES NOT APPLY: s 177 only applies to personal interests in transactions with the company. DOES NOT APPLY: s 175 (duty to avoid conflicts of interest) does not apply to conflicts arising from transactions with the company.

Question 41

What is MA 14?

Answer 41

director cannot vote or count in the quorum on a matter where they have a direct or indirect personal interest when a company disapplies MA 14, obligation to declare interest under s 177 still exists

Question 42

What are the remedies available for breach of directors' duties?

Answer 42

account of profits equitable compensation for company's loss rescission of any contract entered into as direct/indirect result of breach injunction restoration of property damages for breach of s 174 as it amounts to negligence

Question 43

how can a breach be ratified?

Answer 43

by ordinary resolution of the shareholders: written resolution: If director in question is also a shareholder, they will not be an eligible member for the purposes of a written resolution. OR proposed at GM: if director in question is also shareholder, their votes/votes of anyone connected with them will not count at GM.

Question 44

what is the consequence of a directors' breach being ratified?

Answer 44

director will escape liability

Question 45

What are the requirements for compliance with s 182 CA 2006?

Answer 45

Directors must declare any interest (direct or indirect) in a transaction or arrangement that the company has already entered into

Question 46

How must a declaration under s 182 CA 2006 be made?

Answer 46

specify the nature and extent of the interest. Be made as soon as reasonably practicable. At a board meeting, or By notice in writing to all other directors, or By general notice given at a board meeting.

Question 47

what are the exceptions to the duty under s 182 CA 2006?

Answer 47

The director is unaware of the interest or transaction (reasonable awareness applies). The interest is unlikely to give rise to a conflict. The other directors are already aware or ought reasonably to be aware. It relates to the terms of the director’s service contract.

Question 48

what are the key differences between s 182 and s 177 CA 2006?

Answer 48

s 182 applies to existing transactions, while s 177 applies to proposed transactions. Declaration method under s 182 must follow formal procedures Failure to comply with s 182 is a criminal offence (punishable by a fine) non-compliance with s 177 is a civil matter.

Question 49

What claims can be made against directors of insolvent companies?

Answer 49

wrongful trading fraudulent trading misfeasance

Question 50

What is the possible result of a claim. against a director for wrongful trading?

Answer 50

director may be ordered to contribute to the company’s assets if: The company enters insolvent liquidation or insolvent administration. Before this, the director knew or ought to have known there was no reasonable prospect of avoiding insolvency. The director was serving at the time.

Question 51

What is a defence to a claim of wrongful trading?

Answer 51

director is not liable if they took every step to minimise potential loss to creditors. The court evaluates the director’s actions based on: 1. Objective Standard: The knowledge, skill, and experience reasonably expected of a director in that role. 2. Subjective Standard: The director’s actual knowledge, skill, and experience.

Question 52

what steps can directors take to minimise risk of claim for wrongful trading?

Answer 52

seek professional advice from solicitors/accountants at first sign of problems limit spending check company's accounts regularly keep records of their own actions

Question 53

Who can make a claim of wrongful trading against a director?

Answer 53

liquidator/adminstrator claims can only be Brough when company is in insolvent liquidation or administration.

Question 54

What is a remedy to a successful finding of wrongful trading against a director?

Answer 54

director may have to contribute to company's assets this increases amount payable to creditors

Question 55

What is the liability for directors in a claim of fraudulent trading?

Answer 55

Directors are liable if, during insolvent liquidation or administration, it appears the company’s business was carried on: With intent to defraud creditors (of the company or others), OR For any fraudulent purpose.

Question 56

What is a possible remedy for fraudulent trading?

Answer 56

court may order contributions to the company’s assets from persons knowingly involved in fraudulent trading Directors found liable for fraudulent trading may face criminal conviction

Question 57

Who can bring a claim for fraudulent trading?

Answer 57

liquidator or administrator during insolvency proceedings

Question 58

What is an example of fraudulent trading?

Answer 58

Continuing to incur expenses while knowingly unable to pay creditors

Question 59

What is the difference between wrongful trading and fraudulent trading?

Answer 59

Fraudulent trading requires intent to defraud or fraud, making it harder to prove. Wrongful trading focuses on a director’s failure to minimise creditor losses when insolvency is unavoidable

Question 60

What is misfeasance?

Answer 60

breach of any fiduciary duty or other duty by directors

Question 61

What are the possible remedies for misfeasance?

Answer 61

during winding up of the company: directors may be ordered to contribute to company's assets directors may be ordered to repay, restore or account for any money/property

Question 62

What is a substantial property transaction?

Answer 62

where: a director, in their personal capacity, or someone connected with a director buys from or sells to the company a non-cash asset of substantial value.

Question 63

What is required to approve a substantial property transaction?

Answer 63

ordinary resolution of the shareholders approval also required if the director is a director of company's holding company or a person connected with such a director

Question 64

Who is a connected person?

Answer 64

1. member of directors' family OR 2. a company in which a director/persons connected with a director own/s at leats 20% of body corporate's shares OR is/are entitled to exercise or control the exercise of more than 20% of voting power at a GM of the company

Question 65

What is defined as a member a directors' family?

Answer 65

spouse or civil partner child or stepchild parents any person in enduring relationship with director as their partner any children of a person who lives in an enduring relationship with director as partner

Question 66

what is a non-cash asset?

Answer 66

any property or interest in property, other than cash I.E. Loan to a director is not covered

Question 67

what is classed as 'substantial'?

Answer 67

automatically substantial if over 100k OR if it is more than 5k and more than 10% of company's net asset value

Question 68

What are the exceptions to needing shareholder approval for substantial property transactions?

Answer 68

SPT involving a wholly owned subsidiary of another company. Transactions with members where the person is acting in their capacity as a member of the company. Transactions between a holding company and its wholly owned subsidiary. Transactions between two wholly owned subsidiaries of the same holding company.

Question 69

What is the effect of proceeding with a SPT without shareholder approval?

Answer 69

1. transaction is voidable 2. The following individuals may be required to: Account for any personal gain, and Indemnify the company for any loss or damage caused by the transaction: Directors of the company (or its holding company) involved in the transaction. Persons connected with a director of the company (or its holding company). Any director who authorised the transaction.

Question 70

What two main decisions require prior shareholder approval?

Answer 70

SPTs Loans to directors Both require ordinary resolutions

Question 71

What are the two restrictions on awarding directors' loans?

Answer 71

company cannot make a loan to a director (or provide a guarantee/security for a loan) unless approved by ordinary resolution of the shareholders. If the director is also a director of the holding company, the holding company must also pass an ordinary resolution.

Question 72

What is the procedure for approval of a loan to a director?

Answer 72

A memorandum setting out the loan’s terms and the company’s liability must be: Available at the registered office for 15 days before the general meeting and at the meeting itself, OR Sent with the written resolution, if the resolution is proposed in writing.

Question 73

What are the exceptions to the need for an ordinary resolution to approve directors' loans?

Answer 73

Business-related expenditure (up to 50k). Defence costs for civil or criminal proceedings related to the company or an associated company. Defending regulatory proceedings or investigations. Minor transactions (up to 10k, including all relevant transactions).

Question 74

What happens if a directors' loan is made without shareholder approval?

Answer 74

transaction is voidable by the company director who received loan and director whom authorised it must: account for the gain indemnify the company for the loss Note: liability is joint and several.

Question 75

How can a loan be affirmed even if it has been granted without shareholder approval?

Answer 75

ordinary resolution can be passed, making transaction no longer void

Question 76

What is required to award a long term service contract?

Answer 76

company cannot enter into a service contract with a director for a guaranteed term of more than two years unless shareholders approve it by ordinary resolution

Question 77

How are payments for loss of office made?

Answer 77

Payments exceeding £200 (other than legally required payments) require ordinary resolution approval from shareholders.

Question 78

To whom do the rules on payment for loss of office apply?

Answer 78

Applies to payments made to: Current and past directors. Connected persons Any person for the benefit of a director or their connected persons. Includes payments made when directors sell shares at a price higher than other shareholders could obtain.

Question 79

What are the consequences of not obtaining shareholder approval for a payment for loss of office?

Answer 79

Payment is held on trust for the company. Directors authorising the payment are jointly and severally liable to indemnify the company.

Question 80

How long may a court disqualify a director for?

Answer 80

2-15 years 2 years: Breach of fiduciary duty or failure to file accounts/returns. Up to 15 years: Serious misconduct, e.g., soliciting money from investors while knowing liabilities exceed assets.

Question 81

Is there any way a director subject to a disqualification order may be able to obtain leave of the court?

Answer 81

Rarely granted but possible if: The director acted without dishonesty. The company is profitable and unlikely to become insolvent. Other directors provide oversight to prevent misconduct.