Business (Director Duties)

Question 1

What is the authority of directors in decision-making?

Answer 1

CA 2006 reserves certain important decisions for shareholder approval.

However, the board can generally make decisions on behalf of the company and can delegate decisions to other directors or a committee.

Question 2

What are the accountability measures for directors?

Answer 2

Directors can be held accountable for wrongs through civil and criminal actions for breaches of the Companies Act, Fraud Act, Insider Dealing (Criminal Justice Act 1993), and Money Laundering (Proceeds of Crime Act).

Question 3

What are the types of directors recognized under company law?

Answer 3

• De Jure
• De Facto
• Shadow
• Executive
• Non-Executive
• Alternate Directors

Question 4

What is a De Jure director?

Answer 4

A director who is** validly appointed at law**, with at least one required for a private limited company and at least two for a public limited company.

Question 5

What is a De Facto director?

Answer 5

A De Facto director acts as a director without a valid appointment, but still has fiduciary duties and liabilities.

Question 6

What is a Shadow director?

Answer 6

A Shadow director influences the board without being formally appointed, as defined by Section 251(1) CA 2006, but still bears the same duties as directors.

Question 7

What is an Executive director?

Answer 7

An Executive director is a director appointed to executive office, **working primarily on the business **and also serving as an officer and employee.

Question 8

What is a Non-Executive director?

Answer 8

A Non-Executive director is an officer of the company who does not participate in day-to-day operations.

Question 9

What is the role of Alternate Directors?

Answer 9

Alternate Directors replace absent directors and have voting power, with duties applying to them as well.

Question 10

What are the responsibilities of a Company Secretary?

Answer 10

The Company Secretary handles administrative tasks but is not required in private companies, only in public companies per s.271.

Question 11

What governs the appointment of directors?

Answer 11

The appointment of directors is governed by the Articles of Association

Model Articles stating they can be appointed by ordinary resolution of GM or by decision of the directors.

Question 12

What is required for the service contracts of executive directors?

Answer 12

Executive directors must have a written contract of employment…

• There is no automatic entitlement for directors to be paid for their services.
• Service contracts must be kept for inspection at the registered office.
• Shareholder approval is required to enter into long-term service contracts per s.188 CA

Question 13

Do directors need to disclose their identity publicly?

Answer 13

• Every company must maintain a register of its directors > the information at Companies House is available for inspection by the public.
• The register must be kept at a company’s registered office and open to inspection by other members without charge; and by anyone else for a fee.

However, the service address can either be residential or the registered company office. Whilst directors have to provide their residential address, this is kept separate and not open to public

Question 14

What is the process for removing a director?

Answer 14

Shareholders can remove a director by ordinary resolution with 28 days’ special notice

The board cannot remove a director unless allowed by the Articles.

Question 15

What are the grounds for automatic termination of a director?

Answer 15

A director ceases to be a director if
* disqualified
* in an individual voluntary arrangement
* bankrupt
* deemed physically/mentally incapable.

A director can resign and the board usually pass a resolution accepting the letter.

Question 16

What is the retirement and re-election requirement for public companies?

Answer 16

Public companies must require directors to retire and be reappointed by members every three years,

There are annual re-elections for listed companies.

Question 17

What are the grounds for director disqualification?

Answer 17

Disqualification (by a court) can occur due to fraudulent or wrongful trading and persistent breaches of company law, with a maximum disqualification period of 15 years.

Question 18

To whom do directors owe their duties?

Answer 18

Directors owe their duties to the company under s.171-177 CA 2006, with a shift towards creditor protection when the company is in financial difficulty.

Question 19

What is the duty to act within powers?

s.171

Answer 19

Directors must act within the company’s constitution and exercise powers for their intended purposes.

Question 20

What is the duty to promote the success of the company?

s.172

Answer 20

Directors must act in good faith to promote the company’s success for the benefit of members as a whole, considering…

• Likely long term consequences
• Employees interests
• Need to foster relationships with suppliers and customers
• The impact on community & environment
• Desirability of maintaining a reputation for high standards of business conduct
• The need to act fairly as between the members of a company

Question 21

What is the duty to exercise independent judgment?

s.173

Answer 21

Directors must make their own judgments and not blindly follow others’ views, while relying on advice from external parties.

Question 22

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

s.174

Answer 22

Directors are expected to meet both objective and subjectivestandards of skill based on their role and individual knowledge.

It is the level of skill that would be exercised by a reasonable diligent person with…

1. The general knowledge skill and experience that may be expected of someone in their role (objective) ; and
2. The general knowledge, skill and experience of that director (subjective)

Question 23

What is the duty to avoid conflicts of interest?

s.175

Answer 23

Directors must avoid situations where they have a direct or indirect interest that conflicts (or could possibly conflict) with the company’s interests.

Importantly, the duty is not infringed if…

1. The situation cannot reasonably be regarded as likely to give rise to a conflict of interest
2. If the conflict arises in relation to a transaction with the company (e.g. between director and company); or
3. If the conflict arises in relation to a matter authorised by the directors.

Question 24

What is the duty not to accept benefits from third parties?

s.176

Answer 24

Directors must not accept benefits from third parties due to their position, unless it does not lead to a conflict of interest.

This is not breached if acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest

Unlike s.185, the other directors cannot authorise an arrangement under s.176.

Question 25

What is required for declaring an interest in a proposed transaction?

s.177

Answer 25

Directors must declare any interest in proposed transactions to other directors, with details before the transaction occurs.

The declaration can be at a board meeting or in writing in advance of the board meting.

A director does not need to make a declaration when:

1. The director is not aware of the interest or transaction or arrangement
2. The interest cannot be reasonably regarded as likely to give rise to a conflict
3. The other directors know or ought to have known about the conflict of interest
4. If the conflict arises because it concerns their service contracts and their service contract has/will be considered by the board of directors.

Question 26

What does s.177 and MA14 say about quorum and voting?

Answer 26

MA14 states that interested directors cannot vote or count in the quorum for resolutions regarding their interest unless…

• The company disapplies MA14 by ordinary resolution
• The director’s interest cannot be reasonably regarded as likely to give rise to a conflict
• The conflict arises from a permitted cause.

Question 27

What remedies are available for breaches of director duties?

Answer 27

The company can seek…
* Injunction
* Setting aside transaction
* Restitution and account of profits
* Restoration of property
* Damages

Note, for breach of the duty of skill and diligence (s.174) only damages are allowed!

Question 28

Can shareholders ratify breaches?

Answer 28

The shareholders can, by ordinary resolution, ratify…
* Negligence
* Default
* Breach of duty
* Breach of trust

Unlawful acts can never be ratified; nor can breach of duties in insolvency situations, since duties are then owed to creditors.

Question 29

What is required for long-term service contracts?

Answer 29

Shareholder approval by ordinary resolution is required for contracts guaranteed for over two years, with a memorandum made available to members.

Question 30

How long must a service contract be to require shareholder approval?

Answer 30

A guaranteed period in excess of two years.

• It must be over 2 years (not just 2 years)
• This ‘period’ must continue other than at the instance of the company
• During the time the company cannot terminate or can only terminate in specific circumstances
• Notice periods can play a role

For example, a company is unable to terminate a directors service contract for 18 months. However, they can then give a minimum 9 months notice to terminate = this falls within s.188(3) because the aggregate period of the two provisions is in excess of two years.

Question 31

What are the consequences of non-compliance with long-term service contract provisions?

Answer 31

If a service contract violates s.188, the provision guaranteeing a term over two years is void, allowing the company to terminate the contract at any time with reasonable notice.

Note, the whole contract isn’t void - just the term guaranteed the two years.

Dont forget reasonable notice is still needed

Question 32

Does the director have to disclose their interest in the serbice contract?

Answer 32

A director is not required to disclose their interest in the service contract

Question 33

When isn’t shareholder approval needed for a long term service contract?

s.186

Answer 33

Approval is not required by the members of any company which is a wholly owned subsidiary of another company.

For example, if we know that “the company has one shareholder, which is its parent company” the company is a wholly owned subsidiary so is exempt from obtaining approval.

Question 34

What is the requirement under s.190 for substantial property transactions?

s.190-196 (SPTs)

Answer 34

Substantial non-cash assets transactions between directors/connected persons and the company require shareholder approval by ordinary resolution.

Question 35

What constitutes a substantial non-cash asset?

s.190-196 (SPTs)

Answer 35

• An asset worth over £100,000 is substantial
• Those worth between £5,000 and £100,000 are substantial if they exceed 10% of the company’s net value
• Asset worth £5,000 or less is not a substantial asset.

Question 36

What is meant by connected persons in relation to substantial property transactions?

s.190-196 (SPTs)

Answer 36

Connected persons include
* Spouse
* Parents
* Children
* Step Children
* Companies where the director holds 20% or more of shares.
* Business partner of the director or those connected with then
* Trustees of a trust the beneficiaries of which include director or those connected

Question 37

Is there an exception to the s.190-196 (SPTs) approval requirment?

Answer 37

Approval is not required by the members of any company which is a wholly owned subsidiary of another company.

However, if a transaction is between a company and director of a holding company, the holding company will need to approve the transaction.

Question 38

What is the remedy for voidable transactions involving substantial property?

Answer 38

Voidable at the instance of the company unless restitution is impossible, the company has been indemnified, or third-party rights would be affected.

The involved directors and those connected are liable to account to the company for any profits made and to indemnify the company for loss incurred

Question 39

What is required for loans and related transactions with directors?

s.197-214 Loans with Directors

Answer 39

Loans, quasi-loans, and credit transactions to directors or connected persons require shareholder approval by ordinary resolution.

Question 40

What is a loan?

Answer 40

Company lends money to the director or connected person

Question 41

What is a quasi loan?

Answer 41

Company agrees to pay off outstanding accounts owed by a director or connected person to a third party on the view that the director will reimburse the company

Question 42

What is a credit transaction?

Answer 42

Transactions entered into between company and director/connected person where the company provides goods/services on a credit basis

Question 43

What is a guarantee or security?

Answer 43

A director/connected person obtains a loan from a bank and the company stands as guarantor.

Question 44

When is shareholder approval required for transactions with directors/connected persons in a Public Company?

s.197-214 Loans with Directors

Answer 44

Public companies require Shareholder approval for all transactions with directors or associated people.

Loans, Quasi Loans, Credit Transactions, Guarantees, Security = Ordinary Resolution

This is the same as a Private Company Associated with Companies

Question 45

Th

When is shareholder approval required for transactions with directors/connected persons in a Private Company Associated with Companies?

s.197-214 Loans with Directors

Answer 45

A private company associated with a company requires Shareholder approval for all transactions with directors or associated people.

Loans, Quasi Loans, Credit Transactions, Guarantees, Security = Ordinary Resolution

This is the same as for public companies

A company is associated if one is subsidiary of the other, or both are subsidiaries of the same body corporate (children, parent, sibling companies)

Question 46

When is shareholder approval required for transactions with directors/connected persons in a Private Company

Note, that isn’t associated with companies in the trasaction

s.197-214 Loans with Directors

Answer 46

Ordinary Resolution only Loans, Guarantees, Security with the Director.

No approval needed for quasi loans, credit transactions nor for any transaction with connected persons.

Question 47

What is the status of transactions between a company and a director of a holding company?

s.197-214 Loans with Directors

Answer 47

The **holding company ** will need to approve the transaction.

The wholly owned subsidiary need not give approval