8: Companies: Management

Question 1

8 types of director?

Answer 1

De facto director
- anyone who acts as a director
- not specifically appointed
- becomes liable as a director due to his or her conduct

De jure director
- appointed through correct legal procedure

Shadow director
- person in accordance with those directions or instruction the directors of a company are accustomed
- not a director is only acting on advice in processional capacity

Alternative director
- appointed by director to attend and vote at board meetings
- may be another director or outsider
- might be subject to board approval

EDs
- full time employee involved in management
- normally has a specific role

NEDs
- part time
- bring outside expertise
- not an employee
- controls EDs

Managing director
- day to day management of company’s business

Chairman
- ensured procedures in meetings is followed
- Usually a NED

Question 2

Appointment of directors in brief?

Answer 2

Appointed by existing directors or ordinary resolution

Directors of public companies should be voted on individually

Actions are valid unless appointment is defective

Company must notify registrar of changes within 14 days. Must also update register of directors

Question 3

The ways a director might leave office?

Answer 3

Death

Winding up of company

Removal

Disqualification

Resignation

Not offering themselves for re-election

Question 4

The mod articles provide that a director should leave office in what circumstances?

Answer 4

Prohibited from being a director by law

Bankruptcy order is made

Medical practitioner gives written opinion that they are physically or mentally incapable

Court passes order that mental health prevents them from exercising powers of director

Director resigns

Question 5

The procedure for the removal of a director?

Answer 5

Special notice (28 days) is required of the resolution by persons wishing to remove director

Forward the copy of the resolution to the director concerned

Notice of meeting goes out, all members entitled to attend and vote

Director in question can require the company to circulate written reps to members

At the meeting, director can read out reps.
Director must be allowed to attend the meeting and to speak.
An ordinary resolution is passed to remove director

Question 6

When is the power of members to remove a director limited?

Answer 6

Director who is also a member may validly be given weighted voting rights in decision to remove them

Shareholder agreement may state that shareholders of each class must be present for decisions to be valid. One person not attending could prevent removal!

Question 7

How do director’s exercise powers?

Answer 7

Members delegate to directors

Directors are required to exercise their powers in accordance with company’s constitution.

Most companies have unrestricted objects, but articles may specifically restrict

Power is given to board as a WHOLE.

Members have no right to interfere in decisions by board. Directors are not agents of the members and are not subject to their instruction.

Question 8

What kind of restrictions are put on directors powers?

Answer 8

General statutory restriction
- directors can use powers for ‘purpose for which they are conferred’
- directors using powers for any other reason is a breach

Specific statutory restrictions
- certain decisions must gain shareholder approval by way of ordinary or special resolution

Restrictions in articles
- provisions in articles can restriction directors

Restriction of powers made by members
If members are unhappy they can:
- remove director by ordinary resolution
- alter articles by special resolution

Question 9

What do directors need to bind the company?

Answer 9

AUTHORITY!

Express

Implied
- from the persons position
- MD can bind in same way as board, has authority typical of role

Apparent/ostensible
- director is held out as having authority
- if a third party acts in good faith, company is estopped from denying truth
- third party acts in good faith until contrary is proved, like if they have knowledge of actual lack of authority

Question 10

What happens if transactions are made by board outside board’s powers?

Answer 10

Power of directors is not limited by anything in company’s constitution, provided the other party is acting in good faith

Includes when the transaction exceeds the board’s actual authority

Other party having knowledge of the directors lack of express authority is not enough to demonstrate lack of good faith

So - any contract entered into by board is binding (although members can always restrain board members on making transactions)

BUT - if third party is a director or person associated with director, transaction becomes voidable
- anyone involved in this is then liable to compensate the company for any profit or to indemnify contract

Does not apply if reimbursement is no longer possible or company has affirmed contract

Question 11

What sets the duties of directors?

Answer 11

Companies Act 2006 sets specific statutory duties

The ones in legislation are general duties - learn!

Individual may still be subject to duties even after they cease to be director

Question 12

Directors general duties: Act within powers?

Answer 12

Director must act in accordance with company’s constitution

Only use powers for the purpose which they were given

If director carries out a transaction they do not have authority for, it is void, unless approved by shareholders

Question 13

Directors general duties: promote the success of the company?

Answer 13

Directors must act in good faith, in a way which promotes the success of company and benefit of the members

Directors must have regard to:
- consequences of long term decisions
- interest of employees
- need to foster business relationships
- impact of company’s operations on community and environment
- desirability of reputation
- need to act fairly between members

Question 14

Directors general duties: exercise independent judgement

Answer 14

Duty is not infringed by a director acting:
- in accordance with an agreement duly entered into that restrict the future exercise of discretion
- in a way authorised by the company’s constitution

Question 15

Directors general duties: exercise reasonable care and diligence

Answer 15

Standard expected of a director is that of a reasonably diligent person with:

• general and actual knowledge, skill and experience that could be expected and is held

Question 16

Directors general duties: avoid conflicts of interest

Answer 16

Avoid a situation where the director is in conflict with the interest of the company

Not infringed if matter has been authorised by directors, provided articles do not say otherwise

Duty does not apply to a transaction or arrangement

Relevant director does not count towards quorum on determining authorisation

Question 17

Directors general duties: do not accept benefits from third parties

Answer 17

Director must not accept any benefit from third party

Unless acceptance will not give rise to conflict of interest

Question 18

Directors general duties: declare an interest in a proposed transaction or arrangement

Answer 18

Director must declare the extent and nature of such an interest

Declaration can be made:
- in writing
- at a board meeting
- or by general notice

Question 19

Who do the directors owe their duties to?

Answer 19

The shareholders as a collective - present and future

The directors owe no general duty to independent members

Breaches may be ratified

Question 20

What are the consequences of a breach of duty?

Answer 20

Director will be required to make good any loss suffered

Contracts between company and director may be voidable

Any property taken by the director can be recovered

Property may be recovered directly from a third party, unless party acquired in good faith

Injunction when breach has not yet occurred

Any provision to exempt a director for liability, due to breach or negligence, is void

BUT if course decides directors were acting honestly and reasonably, and thinks they ought to be fairly excused, they may not be liable

Question 21

Definition of fraudulent trading?

Answer 21

Company’s business is carried on with intent to defraud creditors

Offence may be criminal or civil

Can involve just one transaction

High burden of proof involved

Question 22

Definition of wrongful trading?

Answer 22

Before the start of winding up, director knew or ought to have known that there was no reasonable prospect that the company could avoid liquidation

And they did not take sufficient steps to minimise any loss

Question 23

Definition of wrongful trading?

Answer 23

Before the start of winding up, director knew or ought to have known that there was no reasonable prospect that the company could avoid liquidation

And they did not take sufficient steps to minimise any loss

Question 24

Who is liable for fraudulent trading?

Answer 24

Any persons knowingly partly to the fraud

Can be a person taking the decisions or playing an active part of the business

Question 25

Who is liable for wrongful trading?

Answer 25

Directors and shadow directors

Reasonably diligent director needs to take steps expected of a reasonable director, or director with higher skills (if they should have them!)

Question 26

Consequences of fraudulent trading?

Answer 26

Contribute to the contribute’s assets

Up to 15 years disqualification under CDDA86

Fine and/or imprisonment up for 10 years

Question 27

Consequences for wrongful trading?

Answer 27

Contribute to the contribute’s assets

Up to 15 years disqualification under CDDA86

Question 28

Case law for fraudulent and wrongful trading?

Answer 28

Fraudulent - R v Grantham
- ordering goods knowing they would not be paid

Wrongful - Re Produce Marketing Consortium

Question 29

What can a disqualified director not do? The act?

Answer 29

Company Directors Disqualification Act 1986 (CCD86)

Disqualified director cannot be concerned in the management of a company, directly or indirectly

OR be a liquidator, receiver or promoter

Question 30

7 grounds for disqualification? And lengths of disqualification

Answer 30

Persistent breaches of Companies Act
- 3 convictions for default in 5 years counts
- max 5 years

Conviction of serious offence in mgmt
- max 15 years

Fraudulent or wrongful trading
- max 15 years

SoS finds the director to be unfit to be in mgmt of company
- max 15 years

Liquidator’s report finds the director to unfit to be in mgmt
- min 2 years and max 15 years

SoS feels in the public interest
- max 15 years

Breach of competition law
- max 15 years

Question 31

What happens as a breach of disqualification order?

Answer 31

Criminal offence!

Fine/imprisonment

Disqualified is personally liable for debts of company while acting

Question 32

What docs regulate members?

Answer 32

Articles of association set the company’s internal regulations

Shareholders agreement (optional)
- private document, contractual
- sets out members rights and duties
- gives more protection to members

Question 33

What are the rights of members?

Answer 33

Have a right:
- to be sent a copy of annual accounts and reports
- to require directors to call general meeting
- to appoint a proxy to exercise their rights
- claiming information rights, on their funds

Can also take action to enforce their personal rights of membership

Main duty just to approve members actions

Question 34

What 4 things require member approval?

Answer 34

Service contracts

Substantial property transactions

Loans to directors

Payments for loss of office

Question 35

Members approval: service contracts?

Answer 35

Required if contract is for a guaranteed period of two years or more

If not approved, contract to include a term allowing the company to terminate with reasonable notice

Question 36

Members approval: substantial property transactions?

Answer 36

Director acquires substantial non-cash asset

‘Substantial’ is value either exceeds £100,000 or 10% of company’s asset value and is more than £5,000

Failure to get approval:
- transaction voidable
- director liable to account for any gain or to indemnify it

Question 37

Members approval: loans to directors?

Answer 37

Any loan by company to director
Or
Guarantee/security by company in connection with loan from third party to director

Written memo must be given to members

Failure to get consent results in:
- transaction voidable
- director liable to account for any gain or indemnify it

Question 38

What loans to directors do not require approval from members?

Answer 38

Expenditure on:
- company business
- defending proceedings or regulatory action/investigation

Minor transactions in regular course of business

Intra-group transactions

When the business of company is money-lending

Question 39

Members approval: payments for loss of office?

Answer 39

Payments or benefits to be made on loss of office or retirement

Written memo must be sent

Payments will be held on trust where approval is not sought

Any director who authorised is liable to indemnify company for loss

Question 40

How can members exercise their votes?

Answer 40

They can do this in their own interest - they are not required to act in the benefit of the company

Remember: claimant is always the company. If minority unhappy with decision, they have no recourse as company is separate legal person

Question 41

4 remedies for unhappy minority shareholders?

Answer 41

Any member
- can apply to court to prohibit a payment out of capital by private company
- prevent registration of limited company as unlimited company

> 5% voting rights
- force inclusion of a resolution on agenda of AGM
- can require directors to call GM

> 15% voting rights
- can appeal to court to cancel a variation of class rights

> 25% voting rights
- can defeat a special resolution to alter name or articles, reduce share capital, wind up company

Question 42

What are derivative actions?

Answer 42

A ‘derivative’ claim can be brought against a director where there has been a breach of duty or negligence

Brought by members, needs permission of the court

Court will consider:
- was member was acting in good faith
- has company had decided not to pursue the claim
- what is the view of members with no person interest
- does the member have the ability to pursue the matter in their own right

Question 43

When will the court refuse permission for a derivative claim?

Answer 43

When it is satisfied that:
- act was authorised or ratified
- person was acting in accordance of duty to promote success of company

Even if granted, director can lose liability if court considers that
- they acted honestly and reasonably
- they ought to be fairly excused

Question 44

How does unfairly prejudicial conduct work?

Answer 44

Any members may apply to the court

When the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of members

Or an act or omission is or would be prejudicial

In order to claim relief:
- petitioner must be member of company
- complaint must be based on prejudice of them as a member

Question 45

What can be classified as unfairly prejudicial conduct?

Answer 45

No statutory definition - the test is objective. These are just examples:

• shareholder dismissed as a director, prejudiced if company is quasi-partnership
• failure of pay dividends or call general meeting
• improper allotment of shares
• diverting business opportunities

Question 46

What happens if a petition for unfairly prejudicial conduct is successful?

Answer 46

Court may make whatever order it thinks fit

Usually one of:
- requiring company to purchase shares of petitioner at fair price
- authorising court action in company’s name
- regulating future conduct in company’s name
- ordering company to perform or not perform an act

Question 47

Can a minority shareholder petition to wind up the company?

Answer 47

Yes! On the grounds that it is just and equitable to do so.

Member must show there is not other suitable remedy available

Orders are made when:
- company was formed for illegal or fraudulent purpose
- complete deadlock in management’s affairs
- shareholders have lost confidence in company’s management

Question 48

Everything about AGMs

Answer 48

Held once a year, within 6 months following accounting refence date

21 days notice required unless agreed otherwise by all
- must be stated as an AGM

Company and officers can be fined if not held

Private companies do not need to hold

Business includes:
- consider accounts, appoint auditors, elect directors, declare dividends

Members can force inclusion of a resolution on agenda if they:
- hold 5% voting rights
- 100 members each hold average of £100 of paid up share capital

Question 49

Everything about GMs

Answer 49

Held whenever required

Must be held by a plc if a serious loss of capital has occured

14 days notice period

Person who requisitions the meeting sets the agenda

Question 50

Everything about class meetings?

Answer 50

Meeting of a class of shareholders or debenture holders, normally to consider a variation of their class rights

Notice period also 14 days

At least one third of the nominal value of the issued shares must be present - at least 2 people

Question 51

Everything about class meetings?

Answer 51

Meeting of a class of shareholders or debenture holders, normally to consider a variation of their class rights

Notice period also 14 days

At least one third of the nominal value of the issued shares must be present - at least 2 people

Question 52

Who can call a meeting?

Answer 52

Directors

Members
- can require directors to call a GM if they hold 5% paid up voting capital or voting rights
- directors must then call meeting 21 days
- meeting takes place 28 days of notice
- if directors do not call meeting, members who requested meeting may call meeting themselves taking place within 3 months. Can recover expenses

Resigning auditor
- require directors to convene so they can explain reasons for resignation

Court
- can call meeting on application where it would otherwise be impracticable

Question 53

Who can call a meeting?

Answer 53

Directors

Members
- can require directors to call a GM if they hold 5% paid up voting capital or voting rights
- directors must then call meeting 21 days
- meeting takes place 28 days of notice
- if directors do not call meeting, members who requested meeting may call meeting themselves taking place within 3 months. Can recover expenses

Resigning auditor
- require directors to convene so they can explain reasons for resignation

Court
- can call meeting on application where it would otherwise be impracticable

Question 54

How does general notice work?

Answer 54

Every member and director must receive notice

Accidental failure to give notice does not invalidate the meeting

Notice must include:
- date, time and place of meeting
- general nature of business
- text of any special resolutions

Question 55

The length of notice periods for meetings?

Answer 55

AGM - 21 days
- less if every member entitled to attend and vote agrees

GM - 14 days
- less if members holding at least 90% of the shares agree

These include ‘clear days’ - does not include day notice is given, or day of meeting

Question 56

What is special notice and what is the notice period?

Answer 56

Required for the removal of a director or auditor

Requires 28 days notice

Person in question can submit written reps and require them to be circulated

Question 57

When and how are special resolutions made?

Answer 57

Made when the law or articles state a special resolution should be used.
Examples:
- alter name
- wind up company
- alter articles
- reduce share capital

75% required to pass

To registrar within 15 days

Question 58

When and how are ordinary resolutions made?

Answer 58

Used whenever special resolution not required

50% required to pass

To registrar only if required by statute

Question 59

When and how are written resolutions made?

Answer 59

Private companies only

Can be used for any decision barring those needing special notice - so cannot be used to remove director or auditor

Members cannot revoke agreement

Date of resolution is date when majority is reached

Resolution must be passed within 28 days of its circulation

% to pass is same majority as in GM

To registrar if a majority of 75% is required

Question 60

What is procedure at meetings?

Answer 60

Quorum - minimum number of members need to be present to validate business

If not present, meeting is described as inquorate

Voting is share of hands - one member one vote

Poll may be demanded by members holding 10% of voting rights.
- means members get the number of votes they are entitled to by their shareholding
- replaces previous share of hands
- quoted companies must publish results of poll on website

Question 61

How do single member companies conduct meetings?

Answer 61

Can conduct business without the need for notice or minutes

They must still keep full written records of any decision which should have been taken in general meeting

Records must be retained for 10 years