7 - Directors' duties

Question 1

Can more than one duty be breached in one action?

Answer 1

Yes

Question 2

S.170(1) states general duties are owed by who, to who?

Answer 2

By a director of a company, to the company

Question 3

Significance of general duties being owed to ‘the company’ (2)

Answer 3

• Directors don’t owe duty to other persons (members, employees, creditors)
• Only company itself, and those empowered to bring claims on company’s behalf, can commence proceedings for breach of duty

Question 4

2 caveats of general duties being owed by ‘a director of the company’

Answer 4

• Also apply to shadow directors
• Can apply to former directors

Question 5

Two duties imposed by S.171

Answer 5

• Act in accordance with company’s constitution
• Only exercise powers for purposes for which they are conferred

Question 6

Consequence of director breaching constitution

Answer 6

They are required to account for any gains made, or compensate company for losses sustained, as a result of breach

Question 7

What is the significant point of note in how courts decide whether director has exercised powers for improper purpose?

Answer 7

The substantial purpose of the power being exercised is ascertained. - If this is proper, no breach has occurred, even if another less substantial purpose is improper

Question 8

CA 2006 - which duty replaced duty to act bona fide in the interests of the company? - S.172 duty

Answer 8

• Duty to promote the success of the company *
  ‘[a] director of a company must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’

Question 9

Duty to promote the success of the company - objective or subjective?

Answer 9

Subjective insofar as the wording is ‘act in a way he considers… will promote’
However, if success of company has not been considered, then objective

Question 10

What does the Act mean by ‘success of the company’?

Answer 10

It doesn’t really given any guidance. Companies are free to define this themselves in the articles but few do. Could be financial but a wide array of factors are at play.

Question 11

Does a director breach duty to promote success of company ‘for benefit of its members as a whole’ if part of the membership’s interest don’t align with the of company?

Answer 11

No

Question 12

6 matters to which directors must ‘have regard to’ when promoting success of company - S172(1) factors

Answer 12

• Likely long-term consequences of decision
• Interests of employees
• Need to foster relationships with suppliers, customers, etc.
• Impact on community and environment
• Desirability to maintain a reputation for high standards of business conduct
• Need to act fairly as between members

Question 13

Remedies to breaches in S.172 duty

Answer 13

• Agreement is voidable at company’s instance
• Director in breach may be required to compensate the company

Question 14

S.173 duty

Answer 14

A director must exercise independent judgement

Question 15

2 exceptions to duty to exercise independent judgement

Answer 15

• Where director is acting in accordance with agreement which restricts future exercise of discretion
• Where director acts in a way that is authorised/required by company’s constitution

Question 16

Remedies to breaches in S.173 duty

Answer 16

• Agreement is voidable at company’s instance
• Director in breach may be required to compensate the company

Question 17

S.174 duty

Answer 17

A director of a company must exercise reasonable care, skill and diligence

Question 18

S.174 - What standard of care, skill and diligence are directors required to meet?

Answer 18

That which would be exercised by a reasonably diligent person with:

• knowledge, skill and experience that would be expected of director of that company (objective)
• knowledge, skill and experience of the director (subjective)

Question 19

Remedy to breaches in S.174 duty

Answer 19

Director will be required to compensate company

Question 20

S.175 duty

Answer 20

Duty to avoid conflicts of interest

Question 21

Re. S.175, what accounts to a conflict?

Answer 21

Must arise from a transaction or arrangement with a third party

Question 22

Does S.175 duty only apply to current directors?

Answer 22

No, also applies to former directors

Question 23

When (and when aren’t) former directors found to have breached S.175 duty?

Answer 23

No breach - simply by vacating office and setting up a rival business
Breach - property, information or opportunity of which director became aware at a time when they were director is exploited

Question 24

2 instances where courts may be less likely to hold that former director has breached S.175

Answer 24

• Reason for resignation was not to compete
• Director resigned due to being excluded from management

Question 25

S.175 conflict authorisation - what do private model arts say?

Answer 25

They do not invalidate directors’ ability to authorise conflicts

Question 26

S.175 conflict authorisation - what do public model arts say?

Answer 26

They do NOT contain provision enabling directors to authorise conflict

Question 27

Authorising conflicts - private companies

Answer 27

Directors may authorise conflict providing that constitution does not invalidate authorisation

Question 28

Authorising conflicts - public companies

Answer 28

Directors may only authorise conflict if there is a provision in the articles enabling them to do so

Question 29

4 rules to be complied with when authorising conflict

Answer 29

• Must be obtained prior to dir. entering into agreement
• Authorisation only valid if conflicted director did not count towards quorum and vote
• Directors have acted in accordance with general duties
• Authorisation cannot avoid director being in breach of other duties (than S.175)

Question 30

Remedies to breaches in S.175 duty

Answer 30

• Agreement is voidable at company’s instance
• Director in breach may be required to account for any gains made

Question 31

S.176 duty

Answer 31

Director must not accept benefit from third party conferred by reason of being a director or doing anything as a director

Question 32

What constitutes a benefit from a third party?

Answer 32

Only a benefit that can reasonably be regarded as likely to give rise to a conflict of interest

Question 33

2 exceptions to breach of S.176 duty

Answer 33

• Benefit has been approved by the members
• Director has acted in accordance with provisions of articles

Question 34

4 possible consequences to S.176 breach

Answer 34

• Contract can be rescinded by company
• Company can recover benefit from director, or damages from third part
• Company can summarily dismiss the director
• Offence committed if benefit amounts to a bribe

Question 35

S.177 & S.182 rules (duty)

Answer 35

Regarding disclosing their interest in certain transactions or arrangements

Question 36

Which sort of transactions and arrangements are covered by S.177 rules

Answer 36

Where the director has entered into an agreement with the company, or is the shareholder of another company which has done so

Question 37

Model articles provision regarding S.177 duty on disclosing interests

Answer 37

Director cannot vote or be counted towards the quorum when board decides whether to proceed

Question 38

Remedy to breach of S.177 duty

Answer 38

Transaction or arrangement is voidable at company’s instance - director in breach faces no liability

Question 39

What does S.182 say on conflicting transactions and arrangements?

Answer 39

Where director becomes interested in transaction or arrangement that has already been entered into, he must declare nature and extent to directors

Question 40

1 key difference between S.177 & S.182

Answer 40

S.177 breach results in civil consequences only, S.182 breach results in criminal offence

Question 41

3 ways by which a director found liable for a breach of duty can attempt to avoid liability

Answer 41

• Through a provision excluding or limiting liability
• Through a provision indemnifying the director for any liability he may face
• By seeking to be relieved from liability

Question 42

3 situations where provision indemnifying director (or excluding or limiting liability) will not be void

Answer 42

• Where company purchases and maintains insurance for a director against such liability
• Where company indemnifies director against liability to a person other than the company (ie. a third party)
• Where company indemnifies director who is a trustee of an occupation pension scheme re. that scheme

Question 43

In which 2 ways may a director be relieved from liability?

Answer 43

Members & Court

Question 44

How do members relieve director from liability?

Answer 44

By ratifying their conduct through passing a resolution of the members of the company

Question 45

When may court relieve director (or auditor) from liability?

Answer 45

When they see that he acted honestly and reasonably, and ought to be fairly excused having regard to the circumstances of the case

Question 46

4 types of transactions which potentially give rise to significant CoIs - and therefore require member approval

Answer 46

• Long-term service contracts
• Substantial property transactions
• Loans, quasi-loans and other credit transactions
• Remuneration and payments for loss of office

Question 47

Which length of service contract is considered long term?

Answer 47

Longer than 2 years

Question 48

What is considered a substantial non-cash asset?

Answer 48

Any property or interest in property, other than cash, that:

• Exceeds £100,000
  or
• Exceeds £5,000 and is greater than 10% of net assets

Question 49

Transactions requiring member approval apply to directors and ‘connected persons’. Who are considered ‘connected persons’? (5)

Answer 49

• Members of directors family
• Body corporate with whom director is connected
• Trustees of a trust, the beneficiaries of which include the directors, members of his family, or connected body corporate
• Any partner of director or partner connected to director by virtue of any of above
• Firm which is legal person and of which director is a partner, or one of the partners is connected to a director by virtue of any of above

Question 50

Consequence of long-term service contract not being approved

Answer 50

Still valid, but will be deemed to contain term entitling company to terminate it at nay time by giving reasonable notice

Question 51

3 examples of exceptions to transactions requiring member approval

Answer 51

• Company is in administration
• Relates to a director’s payment for loss of office
• Director is entitled under service contract

Question 52

What can consequences be if transaction (substantial property transaction or loan/quasi-loan/credit arrangement) requiring member approval is not obtained?

Answer 52

• Transaction may be voidable at company’s instance
• Director’s liable to account for gains, and indemnify company for any loss or damage

Question 53

Example of when transaction may not be voidable by company, in instance where required member approval not obtained

Answer 53

If it had been approved by members within reasonable period

Question 54

When will a director not be liable to account for gains, and indemnify company for any loss or damage, in instance where required member approval not obtained

Answer 54

If it can be shown that they did not know of relevant circumstances that constituted the contravention

Question 55

Which companies may not enter into loans with directors (of company or holding company) without member approval?

Answer 55

Private co’s and public co’s

Question 56

Which companies may not enter into quasi-loans with directors (of company or holding company) without member approval?

Answer 56

Public companies (and other associated companies)

Question 57

When is a company ‘associated’ with another?

Answer 57

If one is the subsidiary of the other, or the are both subsidiaries of the same company

Question 58

What is a quasi-loan?

Answer 58

One party agrees to pay a sum for another person, on basis that this will be reimbursed

Question 59

What is the third type of loan-like transaction requiring member approval? loans and quasi-loans

Answer 59

A credit transaction entered into by company for benefit of director or connected person (or by company guaranteeing/securing such a transaction)

Question 60

6 instances where requirement for member approval of prop transaction/loan/quasi-loan/credit arrangement does not apply

Answer 60

• Transaction provides director with funds to meet company’s expenditure
• Transaction provides director with funds incurred in defending specified legal proceedings
• Value of transaction less than £50k
• Loan or quasi-loan does not exceed £10k
• Credit transaction does not exceed £15k
• Loan/quasi-loan/credit transaction is made to an associated body corporate

Question 61

In which 2 instances may a quoted or unquoted traded company make a remuneration payment or a loss of office payment to a director or former director

Answer 61

• Consistent with approved remuneration policy
• Amendment to remuneration policy in order to make payment is approved by resolution of the members

Question 62

What is consequence of payment being made to director where approval is required but not obtained?

Answer 62

• The recipient of the payment holds it on trust for the company that made the payment
• Any director who authorised payment is jointly and severally liable to indemnify company and compensate it for any loss

Question 63

Why is there a difference in ability to make remuneration and loss of office payments between a) quoted and traded companies, and b) unquoted untraded companies?

Answer 63

Quoted and traded companies are required to have remuneration policies

Question 64

A payment for loss of office is a payment made to a director or former director: (4)

Answer 64

• By way of compensation for loss of office
• By was of compensation for loss while director of (or employed by) the company, through other office or employment
• As consideration for or in connection with retirement from office
• As consideration for or in connection with retirement, while director, from other office or employment

Question 65

7 duties of directors

Answer 65

• Act within powers
• Act in a way they consider most likely to promote success of company for its members as a whole
• Exercise independent judgement
• Exercise reasonable care, skill and diligence
• Avoid CoIs
• Must not accept benefits from third parties
• Declare nature and extent of interest in transactions and arrangements (and disclose interests if they arise following approval of transaction/arrangement)