7. Management 2 Flashcards
S171 CA 2006 provides that:
A director of a co must-
Act in accordance with the company’s constitution, and
Only exercise powers for the purposes for which they are conferred
ex of s171 breach
Director permitted to enter into a contract worth £2k
Will have breached his duty to the co if they enter a contract worth £3k
s172
Requires the director
To act in the 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
s172 test
Subjective test
Considers what a director honestly believes promoting the success of the co is (Re Southern Counties Fresh Food)
s173
Director must not fetter their own discretion
s173(2)
This duty is not infringed by [the director of a company] acting-
In accordance with an agreement duly entered into by the company that restricts the further exercise of discretion by its directors or
In a way authorised by the company’s constitution
s174
A director of a company must exercise reasonable care, skill and diligence
This means the care, skill and diligence that would be exercised by a reasonably diligent person with
The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company,
and
The general knowledge, skill and experience that the director has
how does a director fulfil their s174 duty
2 part test
174(2)(a)
Sets out the minimum standard required of a director and is objective
174(2)(b)
Subjective element
Looks at the knowledge, skill and experience of the individual director
Higher skillset/experience = higher standard
s175 duty
A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company
s175(2)
This applies in particular to the exploitation of any property, information, or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity)
Duty of no profit
Relevant to corporate opportunities for the business
example of no profit duty
Eg director obtains info about new business opportunities as a result of being a director, and uses such info for their personal advantage (enters contract in their own name Cook v Deeks)
Aerostar Maintenance v Wilson
Director breached fiduciary duties by setting up a co, taking an aircraft maintenance contract he had originally been negotiation on behalf of the other co
Regal (Hastings) v Gulliver
Co owners a cinema
Regal set up subsidiary to buy 2 further cinemas
Directors of Regal invested money in subsidiary after Regal decided not to invest the money itself
Directors found to be in breach as they profited on the sale of their shares in the subsidiary
Ordered to pay their profit back to the co
s175(4)
If board of directors authorises the matter giving rise to the conflict, there will be no breach
Can a director take an opportunity post-resignation ?
Director cannot resign and take the opportunity post-resignation
What would a director have to do if they are in breach of the no conflict duty?
A director in breach of no conflict duty is liable to account for profits made, unless actions were authorised by the co
s176 duty
A director of a company must not accept a benefit from a third party conferred by reason of -
His being a director, or
His doing (or not doing) anything as director
s177
If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature & extent of that interest to the other directors
Declaration requirement s177
Must be made before co contracts s177(4)
May be made at BM or by notice in writing 177(2)(a) and (b)
Can be made by general notice s177(2)(b)(ii)
MA 14
prohibits director voting where a director has made a declaration
Exceptions to s177 duty to declare interest in a proposed transaction/arrangement with the company
s177(5)
Director does not have to declare their interest where director is unaware of the interest/transaction in question
s182
S182- duty to declare interest in existing transaction or arrangement with company
Directors must declare any interest in existing transactions
Where there was already a contract in existence and the director subsequently became interested
How does a director declare 182 interest in an existing transaction
Declaration to be made as soon as is reasonably possible (s182(4))
BM, or
Notice in writing
General notice
Consequences of a directors breach of duty
Company is the proper claimant and must take action (not SH)
SH may be able to bring derivative action on behalf of the co to enforce rights
Remedies for breach of all duty (bar s174 duty)
Remedies of a co for breach of directors breach of duty
Account for profits (Cook v Deeks)
Return co property (JJ Harrison v Harrison)
Payment of equitable compensation by director (Gwembe v Koshy)
Contract rescission
Injunction
How can a director avoid liability following a breach of their duty?
Authorisation for s175 matter giving rise to conflict
Provided the articles do not prohibit this (s175(5)(a))
Ratification
How can a breach be ratified? s239(1)
Shareholders can ratify director’s breach
Co cannot take action against the director for the breach
Must be taken by shareholders resolution s239(2)
May be OR at GM/WR
If director is shareholder, directors votes and those of any SH connected with such persons is disregarded but forms the quorum s239(4)
Acts which cannot be ratified
If done unfairly/improperly
If illegal
If oppressive towards a minority
Court relief 1157(1)
Court may relieve director of liability if director has
Acted honestly & reasonably, considering all circumstances they ought fairly to be excused
Director can apply before a claim is made (s1157(2))
s233 insurance
S233 provides a co to purchase insurance for directors to cover risk of liability through negligence, default, breach of duty or trust
s232(1) provisions purporting to exempt director from liability is void
What is a substantial property transaction?
Directors buying or selling to/from the co in a personal capacity must obtain consent of shareholders if the asset is of non cash nature and deemed substantial (s190(1))
Who falls within the definition of a connected person 252(2)
Spouse or civil partner
Partner (of whatever gender) with whom the director lives in an enduring family relationship
Children and step children
Partners children or step children if they are under 18 years old and live with the director
Parents
Qualification for ‘substantial’ 191
If value is 5k or less, it is not substantial
De minimis provision and excludes minor contracts between director and co
If value is over 5k but not more than 100k, it is considered substantial only if its value exceeds 10% of co’s asset value (191(2)(A)
If the value is over 100k, it will always be substantial
How can a SPT be approved?
By shareholder resolution (OR or WR)
What if s190 is breached and a SH approval is not received for a SPT
If SH approval is not obtained, contract voidable (unless restitution is not possible) (s195(2))
Director privy to contract may be liable to indemnify co for any losses suffered and account for profits made (195(3))
SH can ratify failure to obtain SH approval by OR/WR within reasonable time (s196)
S197(1)
Shareholder resolution required to approve loan to director or holding co
What is needed to approve a loan to a director?
Memorandum setting out transaction nature, loan amount, purpose and extent of co liability under transaction connected with the loan (s197(4))
Must be available at registered office for not less than 15 days ending on the day of the general meeting and at the meeting itself (s197(3)(b))
If resolution is by WR, copy must be sent to SH with resolution (s197(3))
Liability for director where a tort is committed by the co
Any tort committed by the co does not give rise to liability for directors, even where they caused the tort to be committed
Director liability where they fail to maintain records
S1135 failure to record renders those in default to a fine 1135(3)
May be sentenced to up to 2 years imprisonment s389
Director liability for failure to comply with financial records
Liability to compensate for loss suffered by untrue/misleading statement in required directors report
Criminal offence (ss415/419) not to comply with statutory requirements
Definition of wrongful trading S214 IA 1986
May be brought by liquidator after co goes insolvent/administrator
If some time before winding up, director knew, or ought to have known there was no reasonable prospect that the co would avoid insolvent liquidation
What happens if a director is found guilty of wrongful trading
Has to make a contribution to assets
Test for wrongful trading
What did the particular director know?
What would a reasonable director have known in the circumstances?
What is fraudulent trading? s213
If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
What is a potential consequence of breach of directors duty
Can be disqualified under CDDA 1986
Directors guilty of acting when disqualified -> personal liability for co debts incurred during period when they did so act s15
Bairstow v Queens Moat Houses
Directors authorising payment of dividend may be liable to repay money if the payment was illegal
MA 9
allows any director to call a BM or authorise a secretary to do so at any time
What type of notice must a director give another director before BM takes place
Reasonable notice (Re Homer
What must notice of BM contain
Notice must specify proposed date, time and place of meeting, and means of comms if directors are not all going to be in the same place MA 9(2)
What happens if a director does not give reasonable notice of a BM
If a director has not received notice, they have the right to demand another meeting be held within reasonable time (Browne v Trinidad)
quorum BM
the minimum number of directors required by the articles to be present for valid decisions to be taken
MA 11(2) quorum
min no of directors is 2
What if there are 2 directors and one has a conflict of interest?
MA 14(3) allows SH to pass OR disapplying art 14(1) temporarily to allow director to form quorum, or
Call GM to remove restriction by SR under s21
How many votes do directors have for a BM
Each director has one vote, all resolutions may be passed by majority vote (7(1))
What if there is an equal number of votes at Bm
If there is an equal number of votes, negative view prevails -> resolution defeated
What can a chair do when there BM is deadlocked
Chairperson may have the casting vote
Determines the outcome of the resolution
How long must minutes of a BM be kept for at registered office
10 years (otherwise an offence is committed by every office in default s248)
What do minutes record at BM
Record in overview of the decisions made
Record the reasons for the decisions
Minutes are open to inspection by the directors (Conway v Petronius Clothing Co)
What is a written resolution
Alternative way to decide without having to call/hold BM
The way in which a co with sole director takes decisions
Permitted if the articles allow for this form of decision making MA 8(2)
What must be sent if a decision is being resolved via WR
Copy of proposed resolution to be sent to every eligible director
When is WR deemed to have been passed
If director signs their copy and returns it to the co, resolution is validly passed
s336(1) requirement for an annual GM
public co only
who may call a GM s302
directors
What precedes calling a GM
BR to call GM
How do SH attend GM
notice must be given to all shareholders and to every director s310
How is notice of GM given
Hard copy to be given by post (address appearing on the register of members ss1143(1) and 1144(2)
Notice can be given by electronic means Sch 5, part 3
What must be included in a notice for GM
Time, date and place of meeting (s311(1))
General nature of the business to be dealt with s311(2)
Statement of rights to appoint proxy s325(1)
Full text of SR proposed at the meeting s283(6)(a)
What is a statement of proxy?
Statement of proxy informs recipient SH that if they are unable/do not wish to attend, SH entitled to appoint proxy to exercise vote s325
How many days notice must be given for a GM
SH must be given at least 14 ‘clear’ days’ notice of GM s307
Clear taken to mean the day on which notice is given + day on which meeting is held not to be counted s306
What is a short notice s307
Any notice period less than usual notice period required
2 stage test for short notice s307
Majority of SH must agree to hold the meeting on short notice s307(5)
Those SH must hold at least 90% of the voting shares in the private co (s307(5)(a))
What happens if short notice is used without complying with notice requirement
If short notice is purportedly used without complying with statutory/article requirements, decisions taken at GM is invalid Schofield v Schofield
Invalid notice
Notice must be given in the proper form to all those entitled to it (otherwise resolutions passed may be invalid s301(a))
Deliberate decision not to send notice breaches s171(b)
If notice is accidentally not given, resolutions passed are still valid s313(1)
Quorum for GM s318
s318(2) fixes the quorum at 2 (unless co is single-member co)
Can quorum of GM be reduced to 1 SH
Quorum of co with more than one shareholder cannot be reduced to one as one person cannot constitute a meeting (Sharp v Dawes)
How do SH vote at GM
On a show of hands or
Every SH has one vote
On a poll vote ss282, 283
Every SH has one vote for each share they own
When can a poll vote be taken?
If requested by
Chair
Directors
2 SH
Any SH holding 10%
Role of a proxy at GM s322A
Proxy must vote according to SH wishes s322A
Can a chair be a proxy for SH
yes- s328
How is a proxy’s authority terminated
co must have received intention before GM starts s330
How are ordinary resolutions passed
Passed if a simple majority are in favour s282
more than 50%
When is a special resolution passed
Requires 75% majority to pass s283(1)
SR passed by those who vote, not of all the votes in the co
Can public co use written resolutions s281(2)
no
When are private companies permitted to use written resolutions
Priv co always permitted to use WR instead of GM bar in 2 circumstances
GM must be called to dismiss a director (ss168)
GM must be called to dismiss co auditors (ss510(2))
How are written resolutions circulated
Sending separate copies to each eligible member at the same time as the directors s291(3)(a) or by requisitioning Sh s293(2)(a)
One resolution prepared, a copy of which is sent to SH s291(3)
May be effected hard copy or electronically ss291(3) and 293(2)
When is a WR deemed to have been passed
WR is passed if sufficient eligible members agree to WR by certain deadline
WR passes as soon as required majority have agreed s296(4)
WR must be passed before end of 28 days starting on circulation date
What happens to WR if the deadline has passed
Any agreement past deadline is ineffective s297(2)
How can a single membered co pass deicsions
Passing resolution at GM s301
Passing WR
Taking informal decision without GM or WR
Post decision requirements
Requires SH resolution and related document depending on the decision taken to be filed
All SR/WR taken by unanimous consent to be sent to Registrar ss29, 30 within 15 days of their being made s30(1) otherwise an offence is committed
May require copies of other resolutions
Usually, copies of OR not sent to Registrar
Co must keep records of all resolutions passed at GM s355(1) for 10 years s355(2) at registered office or SAIL otherwise an offence is committed by every officer in default s355(3)
Form for meeting minutes
s1135(1) can be electronically or hard copy
Where are meeting minutes kept
Co can keep minutes at registered office or at a single alternative inspection location (SAIL)
Sail must be in one location and be notified to Registrar on form AD02 and AD03
What is needed if notices are sent via email
SH consent required to be contacted by co by email/electronic means rather than by post (CA 2006, Sch 5, Part 3, Para 6)
Can SH receive documents in hard copy
Sh entitled to receive docs in hard copy if they request so within 21 days of receiving ee communication s1145
