2.1): Directors Flashcards
What are the requirements for directors?
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
What does the board of directors have the power to do in terms of directors?
decide what services the directors may undertake
decided remuneration and benefits for directors
What are executive directors?
they have been appointed to board of directors
they have an employment contract with the company
what are non-executive directors?
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
How is a chairperson appointed?
director appointed to do this
by board resolution
What is a de facto director?
person who acts as a director even though they have never been appointed or validly appointed
what is a shadow director?
person in accordance with whose directions the directors are accustomed to act
AND
has not been validly appointed as a director
How can directors be appointed?
by the board or by ordinary resolution of the shareholders
board resolution is the quickest way
When can a director NOT take office?
if they are disqualified from doing so
When will a director automatically cease to be a director?
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
what are the administrative requirements after appointing a new director?
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
Explain Directors’ Authority?
directors act on behalf of company as agents with company as principal
they have actual and apparent authority to bind the company to contracts
explain actual authority for directors?
express: given directly through service contract or board approval
implied: Arises from past conduct where the director acted similarly without objection from the board
what is apparent authority?
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
explain directors’ liability?
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.
What is the procedure for service contracts for directors?
the board has power to award service contracts not exceeding a guaranteed term of 2 years
what must be done to approve a long term service contract?
approval by ordinary resolution of shareholders needed
What is a possible issue for directors when approving a service contract?
In a two-director company, a director cannot vote or count in quorum when approving their own service contract due to personal interest
What are the solutions available to overcome approval issues for service contracts?
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
What is the process for approving a long term service contract?
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
What would happen if the company enters into a long term service contract without the approval of the shareholders?
the guaranteed term element is void
rest of contract is enforceable
contract can be terminated with reasonable notice
What are the filing requirements for resignation of a director?
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
What are the rules on dismissal of a director?
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.
How can a director be removed?
- by ordinary resolution at a GM
- special notice to company is required
- once special notice received, company notifies director immediately
- company notifies shareholders with GM notice or at least 14 days before GM
- director in question is entitled to speak at GM
What is meant by special notice?
28 days notice before general meeting is required
What is a Bushell v Faith Clause?
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
What can be included to safeguard against removal of a shareholder as director?
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
What are the notification requirements for companies?
- must keep a register of directors
- must keep a register of directors’ residential addresses
- Forms CH01 and CH02 used to notify a change in particulars for natural persons and corporate directors
- Forms AP01 and AP02 used to notify CH of appointment of directors
- File TM01 (human directors) or TM02 (corporate directors) within 14 days of resignation/removal
To whom are directors’ duties owed?
to the company itself not to shareholders or creditors
When a claim is made against a director for breach of duty, who will the claimant be?
the company itself
What are the directors’ fiduciary duties?
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
what will the court apply when judging whether a director has breached their duty to promote the success of the company?
subjective test
director will not be in breach if they, in good faith, believed they were carrying out their duty here
What is meant by the duty to exercise reasonable care, skill and diligence?
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.
What is important to remember when considering the duty to avoid conflicts of interest for directors?
the fact the company has or has not taken advantage of the property, information or opportunity is irrelevant
when does the duty to avoid conflict of interest not apply?
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
what can protect a director from a claim for breach of duty to avoid conflicts of interest?
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
When is there no breach of the duty to not accept benefits from third parties?
if the acceptance of the benefit cannot reasonably be regarded as giving rise to a conflict of interest.
s 177: What are directors required to do if they have an interest in a proposed transaction or arrangement?
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.
s 177: What are the exceptions to the duty to declare interest in proposed transaction or arrangement?
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.
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?
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.
What is MA 14?
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
What are the remedies available for breach of directors’ duties?
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
how can a breach be ratified?
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.
what is the consequence of a directors’ breach being ratified?
director will escape liability
What are the requirements for compliance with s 182 CA 2006?
Directors must declare any interest (direct or indirect) in a transaction or arrangement that the company has already entered into
How must a declaration under s 182 CA 2006 be made?
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.
what are the exceptions to the duty under s 182 CA 2006?
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.
what are the key differences between s 182 and s 177 CA 2006?
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.
What claims can be made against directors of insolvent companies?
wrongful trading
fraudulent trading
misfeasance
What is the possible result of a claim. against a director for wrongful trading?
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.
What is a defence to a claim of wrongful trading?
director is not liable if they took every step to minimise potential loss to creditors.
The court evaluates the director’s actions based on:
- Objective Standard:
The knowledge, skill, and experience reasonably expected of a director in that role.
- Subjective Standard:
The director’s actual knowledge, skill, and experience.
what steps can directors take to minimise risk of claim for wrongful trading?
seek professional advice from solicitors/accountants at first sign of problems
limit spending
check company’s accounts regularly
keep records of their own actions
Who can make a claim of wrongful trading against a director?
liquidator/adminstrator
claims can only be Brough when company is in insolvent liquidation or administration.
What is a remedy to a successful finding of wrongful trading against a director?
director may have to contribute to company’s assets
this increases amount payable to creditors
What is the liability for directors in a claim of fraudulent trading?
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.
What is a possible remedy for fraudulent trading?
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
Who can bring a claim for fraudulent trading?
liquidator or administrator during insolvency proceedings
What is an example of fraudulent trading?
Continuing to incur expenses while knowingly unable to pay creditors
What is the difference between wrongful trading and fraudulent trading?
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
What is misfeasance?
breach of any fiduciary duty or other duty by directors
What are the possible remedies for misfeasance?
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
What is a substantial property transaction?
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.
What is required to approve a substantial property transaction?
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
Who is a connected person?
- member of directors’ family
OR
- 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
What is defined as a member a directors’ family?
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
what is a non-cash asset?
any property or interest in property, other than cash
I.E. Loan to a director is not covered
what is classed as ‘substantial’?
automatically substantial if over 100k
OR
if it is more than 5k and more than 10% of company’s net asset value
What are the exceptions to needing shareholder approval for substantial property transactions?
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.
What is the effect of proceeding with a SPT without shareholder approval?
- transaction is voidable
- 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.
What two main decisions require prior shareholder approval?
SPTs
Loans to directors
Both require ordinary resolutions
What are the two restrictions on awarding directors’ loans?
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.
What is the procedure for approval of a loan to a director?
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.
What are the exceptions to the need for an ordinary resolution to approve directors’ loans?
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).
What happens if a directors’ loan is made without shareholder approval?
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.
How can a loan be affirmed even if it has been granted without shareholder approval?
ordinary resolution can be passed, making transaction no longer void
What is required to award a long term service contract?
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
How are payments for loss of office made?
Payments exceeding £200 (other than legally required payments) require ordinary resolution approval from shareholders.
To whom do the rules on payment for loss of office apply?
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.
What are the consequences of not obtaining shareholder approval for a payment for loss of office?
Payment is held on trust for the company.
Directors authorising the payment are jointly and severally liable to indemnify the company.
How long may a court disqualify a director for?
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.
Is there any way a director subject to a disqualification order may be able to obtain leave of the court?
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.
