Business Law and Practice SBAQs Flashcards
Question 2
A client is Finance Director of a construction company, which has Model Articles of Association for private companies with no amendments. There are two other directors. The company is proposing to buy timber worth £2,000 from a timber company. The client’s brother owns all of the shares in the timber company. The client has told the other directors about this.
A board meeting has been called to approve the terms and enter into the timber contract.
Which of the following statements best reflects the position concerning the client’s duties as a director at the board meeting?
A. As the client has an interest in the timber contract, she must make a declaration of interest.
B. As the client has an interest in the timber contract, she can ask the board to authorise her to count in the quorum and vote.
C. Although the client has an interest in the timber contract, she can count in the quorum at the board meeting but cannot vote on the timber contract.
D. The client need not make a declaration of interest, but she cannot count in the quorum at the board meeting or vote on the timber contract.
E. As the client herself does not own any shares in the timber company, she does not need to declare her interest in the timber contract.
Option D is correct. The general rule under s.177(1) of the Companies Act 2006 is that where a director has an interest in a transaction with the company, she must declare her interest. However, under s.177(6)(b) where the other directors are aware of the interest, there is no need for a declaration – but it is still good practice to do so.
Option A is therefore wrong.
Option B is wrong as the directors cannot authorise the client to count in the quorum and vote. The client has an interest in a proposed transaction. This is not the same as a conflict of interest, where authorisation is possible.
Option C is wrong as under Model Article 14 the client cannot vote or count in the quorum.
Option E is wrong. s.177 applies whether the interest is direct or indirect. Here it is likely her brother will profit from this relationship and contract.
A private company with seven directors has the Model Articles for private companies limited by shares with no amendments. A board meeting is scheduled for next week and the Chairperson intends to propose a resolution to change the company’s registered office.
Five directors (the Chairperson, the Sales Director, the IT Director, the Marketing Director and the HR Director, (referred to collectively as the ‘Directors in Favour’) are in favour of the appointment and the other two directors (the Finance Director and the Operations Director) are against it.
Assume that at the board meeting everyone who attends will vote as indicated above and that none of the directors have a personal interest in the matter.
Which of the following best explains who should attend the board meeting in order for the resolution to be passed?
A. As long as the Chairperson and one of the other Directors in Favour attend the board meeting, the resolution will be passed.
B. As long as the Finance Director and the Operations Director attend the board meeting, the resolution will be passed.
C As long as the Chairperson and any one other director attend the board meeting, the resolution will be passed.
D. As long as two of the Directors in Favour attend the board meeting, the resolution will be passed.
E. As long as any two directors attend the board meeting, the resolution will be passed.
Answer
Option A is correct. Two directors are needed for a quorum (MA 7), so there must at least be two attendees. If however the Finance Director and Operations Director attend, there will need to be at least 3 votes in favour to overcome their 2 votes against. This can be achieved with the Chairperson’s 2 votes (including the casting vote on a tie) and the other director who is in favour.
Option B is incorrect at they intend to vote negatively. Option C-E are incorrect as they will not work if either the Finance Director or Operations Director attends. So those options are not accurate for all situations. (Note that those options do not stipulate that the people mentioned are the ONLY ones there).
Which of the following statements best explains the theory of separation of ownership and control within a company?
A. Shareholders must not be directors of a company, as those who control the company must be kept separate from the owners.
B. Shareholders must not play any part in the management of a company, as the control of a company must be kept separate from ownership.
C. The role of shareholders, who own the company has become separated from the role of directors, who control the company.
D. The directors of the company are controlled by the shareholders in order to prevent power concentrating in the hands of the directors.
E. The shareholders only exercise a supervisory power over the directors, who control the company.
Option C is correct. The theory of separation of ownership and control states that those who run and manage companies (the directors) have become separated from the owners of companies (the shareholders).
Option A is wrong as shareholders may be directors and in the case of small private companies, very often are.
Option B is wrong as the shareholders do have a limited management role – there are certain decisions which cannot be taken without a resolution of the shareholders in general meeting.
Option D is wrong as directors, who exercise their management powers for the benefit of the company, cannot be controlled by the shareholders – they are not ‘delegates or agents’ of the shareholders.
Option E is wrong as the shareholders’ role is not simply supervisory (and the courts have always been reluctant to hold that the shareholders have a general supervisory power over the directors, even if there is a clause in the articles which gives them power to direct what the directors do).
Which of the following statements best explains the position in relation to the directors of a company?
A. Non-executive directors are employees of the company.
B. A company cannot have only one director as it will not be able to hold a board meeting.
C. A company cannot be a director of another company.
D. A non-executive director has the same duties and liabilities as an executive director.
E. Every company must have a mixture of executive and non-executive directors.
Option D is correct. A non-executive director is subject to the same rights and responsibilities as an executive director. If a company acts wrongfully or illegally, all directors may be held liable.
Option A is wrong as non-executive directors are appointed to the board but will not have a service contract and so are not employees of the company. Most executive directors will have contracts of employment and so will also be employees of the company.
Option B is wrong as private companies need only have one director, although a public company must have at least two (s.154 CA 2006). Many small companies are single-director companies. Article 7 MA expressly provides that many of the rules relating to board meetings do not apply to single-director companies.
Option C is wrong as (currently) a company can be a director. A company must have at least one director who is a natural person (s.155).
Option E is wrong as there is no requirement for a company to have non-executive directors on the board. They are more suitable for larger companies, and most small private companies will not have any non-executive directors on the board.
A client is a 17-year-old French citizen currently living in the UK. She is heavily in debt and has never been a director before, nor had any real work experience. Her father is a UK citizen, aged 50, who is employed part-time as a research scientist. He currently attends hospital weekly for treatment for a behavioural problem, related to a brain trauma. Her grandfather is a UK citizen, aged 75, who declared himself bankrupt in 1990. He has since been discharged from bankruptcy and currently works in a cake shop. They are proposing to set up a company together.
The company has Model Articles for private companies limited by shares unamended.
Which of the following best describes who could be the directors in the company?
A. The client, her father and grandfather could all be directors in the company.
B. Only the client’s father and grandfather could be directors in the company.
C. Only the client and her grandfather could be directors in the company.
D. Only the client and her father could be directors in the company.
E. Only the client’s father could be a director in the company.
Option A is correct. There are very few statutory restrictions on who may be a director and none of them apply here.
Options B to E are all therefore wrong.
A director must be at least 16 years of age (s.157 Companies Act 2006), so the client is old enough to be a director. There are no restrictions on foreign nationals being directors.
There is no maximum age limit. A director must not be an undischarged bankrupt (s.11 Company Directors Disqualification Act 1986) without the leave of the court, but as the client’s grandfather has been discharged, he can be appointed.
The articles may place restrictions on who can be a director. Article 18 of the Model Articles for private limited companies prevent the appointment of a person who is certified by a medical practitioner as likely to be physically or mentally incapable of acting as a director (and likely to remain so for more than three months). There is nothing on the facts to suggest that the client’s father is incapable of acting and the facts state that he is currently working as a research scientist.
A private limited company has three directors, all of whom work for the company. Two of the directors also have minority shareholdings in the company. There is a third shareholder with a majority shareholding but this shareholder is not a director. He owns and runs a separate small business. The two director shareholders are greatly influenced by the majority shareholder and typically follow the majority shareholder’s directions when making decisions at both board and shareholder level. The third director, who does not hold any shares in the company, does not have a close working relationship with the majority shareholder and is not influenced by him.
Will the majority shareholder fall within the definition of a shadow director?
A. Yes, because he holds the majority of the shares in the company.
B. No, because he does not work for the company.
C. No, because he could only be classed as a shadow director if he is a person with whose directions the whole of the board is accustomed to act.
D. No, because he has not been appointed as a director.
E. Yes, because he is a person in accordance with whose directions the directors are accustomed to act.
Option E is correct because the definition of a shadow director is a person with whose directions the directors are accustomed to act (s251(1) Companies Act 2006). The facts say that the two director shareholders are greatly influenced by the majority shareholder and typically follow his directions when making decisions at board level.
Option A is wrong because a shadow director need not hold shares in the company and so it is irrelevant that he is the majority shareholder.
Option B is wrong because it is not a requirement that a shadow director should be employed by the company in relation to which he is a shadow director.
Option C is wrong because only a governing majority needs to act in accordance with the majority shareholder’s directions for him to be classed as a shadow director, not the entire board. Here, two out of three typically act in accordance with his directions so that majority is achieved.
Option D is wrong because a shadow director is a person who has not been appointed to the board but who is a person with whose directions or instructions the board is accustomed to act.
A company has Model Articles for private companies limited by shares unamended and has a board consisting of 10 directors. At a board meeting convened to vote on whether the company should enter into a contract to purchase a property, five directors are in favour and five are against. The board has appointed a chairperson. The chairperson is in favour of the resolution.
Which of the following statements best reflects the likely outcome of the vote on the resolution to enter into the contract to purchase the property?
A. As there is deadlock, the resolution to buy the property will pass.
B. As the chairperson is in favour of the resolution, she can use her casting vote to break the deadlock and pass the resolution.
C. As there is deadlock, the resolution to buy the property will be defeated.
D. Chairpersons do not ordinarily vote on board matters, save where there is deadlock, when the chairperson can then vote.
E. Where there is deadlock, the board must adjourn the meeting until the deadlock is resolved.
Option B is correct. The general rule is that where there is deadlock the negative view will prevail. If the chairperson wants the resolution to pass and to break the deadlock, the chairperson would need to use their casting vote.
Option A is therefore wrong.
Option C is not the best answer. Whilst it correctly identifies that the negative view ordinarily prevails, in this case the chairperson will likely use her casting vote to break the deadlock.
Option D is wrong. The chairperson is a director and therefore will vote on board matters. Their appointment as the chair means that they can use an extra vote (their casting vote) to ensure that resolutions pass in cases of deadlock.
Option E is clearly wrong. There is no requirement to adjourn a meeting where there is deadlock.
A client, who was an undischarged bankrupt, invited a friend to set up a scrap metal company with him. The friend was appointed as a director of the company. As the client could not act as a director, the client’s girlfriend was appointed to act as a director, as the client’s nominee. She took no active part in the running of the company, although she did occasionally attend board meetings.
The friend was responsible for the finance and administration of the company, and the client was responsible for the buying and selling of the metals.
The company also appointed an accountant who gave professional advice to the friend on the finances of the company, although the friend did not always follow that advice.
Which of the following statements best explains who would be considered to be a director of the company?
A. As the client was never formally appointed, he was not a director of the company.
B. As the client acted as a director of the company, he was a ‘de facto’ director of the company.
C. As the client’s girlfriend took no part in the running of the company but was formally appointed as a director, she was a shadow director of the company.
D. As the client’s girlfriend took no part in the running of the company, she was not a director of the company, despite being appointed as such.
E. As the accountant gave professional advice to the friend on the finances of the company, he was a shadow director of the company.
Option B is correct. A ‘de facto’ director is someone who has never been formally appointed, as here, but nevertheless acts as a director. Here the client has been acting as a director, for example for being responsible for the sale and purchase of metals, and is likely to be seen as a de facto director.
This makes Option A wrong. It is not necessary for someone to be formally appointed to be held to be a director of a company.
Option C is wrong. The fact that the girlfriend does not take part in the running of the company does not make her a shadow director. Under s.251 CA 2006 a shadow director is someone under whose directions or instructions the directors are accustomed to act. (Note that this is slightly different from a ‘de facto’ director, who actually acts as a director – a shadow director does not necessarily act as a director.)
Option D is wrong. The girlfriend is a ‘de jure’ director. She has been validly appointed, and the fact that she does not take part in the running of the company does not change this.
Option E is wrong. Under s.251(2) CA 2006, giving advice in a professional capacity will not make someone a shadow director – and the facts make it clear that the board does not always follow this advice.
A client is a director of a dog grooming company. There are two other directors, an Operations Director and a Finance Director. Recently, the Operations Director married a property developer, who she met on the internet. The other directors were surprised when she told them of the marriage. They did not attend the wedding, know very little about the property developer and do not know that he has a daughter.
A board meeting has been convened to approve the terms of, and enter into the contracts, for:
- The purchase of office premises from the property developer;
- The sale of a field to the property developer’s daughter;
- The award of a two year service contract to the Finance Director;
- The purchase of dog grooming equipment for £50 from a company in which the Finance Director’s wife has shares.
The company has Model Articles for private companies limited by shares unamended.
Which of the following circumstances best reflects the position in relation to declarations of interest at the board meeting?
A. The Operations Director must declare her interest in the contract for the purchase of the premises.
B. The Operations Director must declare her interest in the contract for the sale of the field.
C. The Finance Director must declare his interest in the service contact.
D. The Finance Director need not declare his interest in the contract for the purchase of the grooming equipment as the contract is for less than £100.
E. A director who fails to declare an interests in a proposed transaction when required to do so will be guilty of a criminal offence.
Option B is correct. On the facts, it appears that the other directors are unaware that the property developer has a daughter. The connection (step-daughter) is close enough that the Operations Director should declare her interest as required by s.177(1) CA 2006.
Option A is wrong as under s.177(6)(b), there is no need for a director to declare an interest where the other directors are aware of it. They know that she has married the property developer. Nevertheless, it is good practice for a director to declare known interests.
Option C is wrong. This is covered by the exception in s.177(6)(c) as it relates to the Finance Director’s service contract. Nevertheless, it is good practice for a director to do so.
Option D is wrong. The size of the transaction is not a relevant factor.
Option E is wrong. It is not a criminal offence to fail to make a declaration of interest in a proposed transaction. (This contrasts with s.183, where it is a criminal offence to fail to make a declaration of interest in an existing transaction.)
A company was set up last year. It has an issued share capital of 100 ordinary £1 shares. It has six directors, who were all granted fixed term service contracts for a term of five years when the company was set up. It has adopted Model Articles for private companies limited by shares with no amendments.
Which of the following decisions to be taken by the directors at their next board meeting requires shareholder involvement?
A. The allotment of an additional 500 ordinary £1 shares.
B. Borrowing £1.5 million from the bank to purchase new office premises.
C. Changing the company’s registered office.
D. Appointing a new director.
E. Dismissing one of the directors.
Option E is correct. A director can only be dismissed before the expiration of their period of office by an ordinary resolution of the shareholders (s.168 Companies Act 2006).
Option A is wrong. The directors of a private company with one class of share, as here, can allot shares without the approval of the shareholders (s.550 Companies Act 2006).
Option B is wrong. The company has Model Articles for private companies limited by shares. Borrowing falls within the directors’ general powers under Model Article 3. As there are no amendments to the articles, there is no cap on the amount that the directors can borrow, so this is within their authority.
Option C is wrong. The directors can take the decision to change the company’s registered office (s.87 Companies Act 2006).
Option D is wrong. A director may be appointed either by the board or by an ordinary resolution of the shareholders (Model Article 17), so shareholder approval is not necessarily needed. It is usually quicker and more convenient for the board to make the appointment.
A private limited company is proposing to hold a general meeting of the shareholders. On 1 September valid notice of the meeting was sent by e-mail to all those entitled to receive it.
Assumption: 1 September was a Monday.
Which of the following is the earliest date on which the meeting can be held?
A. 14 September.
B. 16 September.
C. 18 September.
D. 21 September.
E. 28 September.
Option C is correct. 14 clear days’ notice of the meeting must be given (s.307 and s.307A). The day on which the notice is given and the day on which the meeting is held are not counted, so here the 14 days starts from 2 September and ends on 15 September. In addition, as the notice was sent by e-mail, an extra 48 hours must be added for deemed delivery, taking the date to 18 September (s.1147).
This makes all the other options wrong.
Five shareholders in a company have the following shareholdings:
The Managing Director holds 30 voting shares;
The Finance Director holds 40 voting shares;
A surveyor holds 10 voting shares;
A builder holds 15 voting shares;
An estate agent holds 5 voting shares.
The company has Model Articles for private companies limited by shares unamended.
The Finance Director, the Managing Director, the surveyor and the estate agent have confirmed that they will attend a general meeting which has been validly called to remove one of the directors of the company.
The Finance Director and the surveyor will support the resolution. The builder will not be able to attend but has sent a written statement confirming that he supports the resolution. The Managing Director and the estate agent will oppose the resolution.
The surveyor has called for a poll vote.
Which of the following best explains whether the resolution will pass?
A. It will pass because the Finance Director, the surveyor and the builder together hold more than 50% of the voting shares.
B. It will pass because the Finance Director and the surveyor hold more than 50% of the voting shares of those attending the meeting.
C. It will not pass because the Managing Director on his own can block the resolution.
D. It will not pass because a single shareholder is not entitled to call for a poll vote and, on a show of hands, the resolution cannot pass.
E. It will not pass because the builder must attend or appoint a proxy for the resolution to pass.
Option B is correct. To dismiss a director, an ordinary resolution of the shareholders is required which requires a simple majority (more than 50%). As the builder is not present at the meeting (and has not appointed a proxy), there are 85 voting shares at the meeting, and the Finance Director and surveyor hold 50 of those. On a poll vote, they will together have the requisite majority to dismiss the director.
Option A is not the best answer. Whilst it is the case that all three individuals hold more than 50% of the voting shares, the builder will not be present at the meeting and his shares will not be counted in a poll vote. His written statement cannot be counted in the poll vote.
Option C is wrong as with 30 voting shares, the Managing Director can block a special resolution but not an ordinary resolution.
Option D is wrong as any shareholder holding at least 10% of the voting shares is entitled to call for a poll (s.321).
Option E is wrong as the Finance Director and surveyor can together pass the ordinary resolution required. Not all shareholders need to be present at the meeting.
The directors of a company are proposing to call a general meeting of the shareholders to ask the shareholders to pass an ordinary resolution.
The company has three directors. The Managing Director and the Sales Director are shareholders in the company, but the Finance Director is not. There is one other shareholder who is not a director.
It has Model Articles for private companies limited by shares unamended.
Which of the following statements best describes the position in relation to the notice of the general meeting?
A. The notice must be sent to all the shareholders.
B. The notice must be sent in either hard copy or electronic form.
C. The notice must include the exact text of the proposed resolution.
D. The notice must include a statement of the right of a member to ask for the meeting to be held on short notice.
E. The notice must include a statement of the right of a member to appoint a proxy.
Option E is correct. The notice must include (with reasonable prominence) the right of a member who cannot attend to appoint a proxy. Failure to do so could invalidate the meeting. (s.325 CA 06).
Option A is wrong. For a meeting to be validly convened, the shareholders and the directors are entitled to receive notice of the meeting (s.310 CA 2006), so the Finance Director would also be entitled to receive a copy of the notice.
Option B is wrong. Notice can be sent in hard copy or in electronic form or on a website (or a combination of these). (s.308).
Option C is wrong. The notice need only state the general nature of the business to be dealt with (s.311).
Option D is wrong. There is no requirement to include any statement in relation to short notice.
Three friends have set up a private limited company through which to operate their bakery business. The friends are the only directors and shareholders of the company. The company has adopted the Model Articles for private companies limited by shares (unamended) as its articles of association. The friends are concerned that they should use the correct procedure when taking decisions, in particular in connection with notice for meetings, quorum and voting.
Which of the following statements correctly reflects procedure on notice, quorum and voting?
A. Directors can make decisions by unanimous agreement without calling a board meeting but, at board meetings, directors’ decisions are taken by simple majority.
B. The minimum notice for both a general meeting of the shareholders and a board meeting of the directors is 14 clear days.
C. Neither directors nor shareholders can count in the quorum at their respective meetings on any proposed transaction with the company in which they have an interest.
D. A poll vote at a general meeting can be requested by two or more persons having the right to vote on the resolution or by one shareholder holding at least 5% of the shares.
E. Neither shareholders nor directors can vote at their respective meetings on any proposed transaction with the company in which they are interested.
Option A is correct because model article (MA) 8 allows a unanimous board decision without a meeting and MA7 provides for decisions to be taken by simple majority at a meeting of the directors.
Option B is wrong because, whilst the minimum full notice period for a general meeting is 14 clear days (s307 Companies Act 2006), a board meeting only requires reasonable notice (Re Homer).
Option C is wrong because, whilst directors cannot count in the quorum if they are interested in any proposed transaction with the company (MA14), there is no such provision which applies to shareholders.
Option D is wrong because, whilst a poll vote can be requested by two shareholders (MA44(2)), a single shareholder needs 10% of the voting shares (MA44(2)).
Option E is wrong because, whilst directors cannot vote on any proposed transaction with the company in which they have an interest (MA14), no such restriction applies to shareholders.
The board of directors of a private limited company wants to call a general meeting on short notice. There are five shareholders with the following shareholdings:
A baker – 14,000 ordinary £1 shares
A salesperson – 20,000 ordinary £1 shares
A lecturer – 5,000 ordinary £1 shares
A surveyor – 10,000 ordinary £1 shares
A physiotherapist – 51,000 ordinary £1 shares
Which of the following best describes which shareholders would need to agree in order for the general meeting to be held on short notice?
A. The physiotherapist, because they hold a majority of the company’s shares.
B. The baker, the salesperson, the physiotherapist and either the lecturer or the surveyor, because between them they constitute the required majority in number holding between them at least 90% of the shares.
C. All five shareholders, because they would all be needed in order for the required majority in number holding between them at least 95% of the shares to be met.
D. The baker, the salesperson, the physiotherapist and the surveyor, because between them they constitute the required majority in number holding the majority of the shares.
E. Any three shareholders, because between them they would constitute a majority in number of the shareholders.
Option B is the correct answer. A majority in number of shareholders who between them hold 90% or more of the shares are required in order to agree to a general meeting being held on short notice (s 307(4)–(6) CA 2006).
All of the other options are wrong either because they do not constitute a majority in number of shareholders or because those shareholders do not between them hold 90% or more of the shares.
A private company limited by shares has four directors and four shareholders. One of the shareholders is also a director. The other shareholders who together own the majority of the issued shares in the company wish to remove the director from the board. One member of the board supports the director and does not want him removed. The company has Model Articles for private companies limited by shares unamended.
Which of the following best describes the procedure for removing the director from the board?
A. The majority shareholders can remove the director by ordinary resolution of shareholders passed by written resolution.
B. The board can remove the director by passing a written board resolution.
C. The majority shareholders can remove the director by special resolution passed at a meeting of shareholders.
D. The board can remove the director by a majority vote at a board meeting.
E. The majority shareholders can remove the director by ordinary resolution passed at a meeting of shareholders.
Option E is correct, the director can be removed by ordinary resolution (s 168 Companies Act 2006) passed at a meeting of shareholders.
Option A is wrong as a written resolution cannot be used. This is because a general meeting to remove a director requires ‘special notice’ (under s 312 CA06) and the director threatened with removal is entitled to speak at the meeting.
Options B and D are wrong as the model articles make no provision for the board to remove a director.
Option C is wrong as an ordinary resolution is required not a special resolution.
Five shareholders in a company have the following shareholdings:
The Managing Director holds 30 voting shares;
The Finance Director holds 40 voting shares;
A surveyor holds 10 voting shares;
A builder holds 15 voting shares;
An estate agent holds 5 voting shares.
The company has Model Articles for private companies limited by shares unamended.
The Finance Director, the Managing Director, the surveyor and the estate agent have confirmed that they will attend a general meeting which has been validly called to remove one of the directors of the company.
The Finance Director and the surveyor will support the resolution. The builder will not be able to attend but has sent a written statement confirming that he supports the resolution. The Managing Director and the estate agent will oppose the resolution.
The surveyor has called for a poll vote.
Which of the following best explains whether the resolution will pass?
A. It will pass because the Finance Director, the surveyor and the builder together hold more than 50% of the voting shares.
B. It will pass because the Finance Director and the surveyor hold more than 50% of the voting shares of those attending the meeting.
C. It will not pass because the Managing Director on his own can block the resolution.
D. It will not pass because a single shareholder is not entitled to call for a poll vote and, on a show of hands, the resolution cannot pass.
E. It will not pass because the builder must attend or appoint a proxy for the resolution to pass.
Option B is correct. To dismiss a director, an ordinary resolution of the shareholders is required which requires a simple majority (more than 50%). As the builder is not present at the meeting (and has not appointed a proxy), there are 85 voting shares at the meeting, and the Finance Director and surveyor hold 50 of those. On a poll vote, they will together have the requisite majority to dismiss the director.
Option A is not the best answer. Whilst it is the case that all three individuals hold more than 50% of the voting shares, the builder will not be present at the meeting and his shares will not be counted in a poll vote. His written statement cannot be counted in the poll vote.
Option C is wrong as with 30 voting shares, the Managing Director can block a special resolution but not an ordinary resolution.
Option D is wrong as any shareholder holding at least 10% of the voting shares is entitled to call for a poll (s.321).
Option E is wrong as the Finance Director and surveyor can together pass the ordinary resolution required. Not all shareholders need to be present at the meeting.
At a general meeting of the shareholders, a company has passed a resolution removing one of its directors. Following the meeting, which of the following documents must be filed at Companies House?
A. The minutes of the board meeting at which it was resolved to call the general meeting and the minutes of the general meeting.
B. The minutes of the general meeting and the shareholders’ resolution to remove the director.
C. The minutes of the general meeting, the shareholder’s resolution to remove the director and Form TM01 (termination of appointment of director).
D. The shareholder’s resolution to remove the director and Form TM01 (termination of appointment of director).
E. Form TM01 (termination of appointment of director) only.
Option E is correct. Form TM01 informing Companies House of the termination of an appointment of a director must be sent within 14 day of the date when the appointment was terminated (s.167 CA 2006).
Options A, B and C are wrong. The minutes of both the board meeting and the general meeting must be kept at the company’s registered office (or its single alternative inspection location, SAIL) (s.248/MA15 and s.355 respectively).
Option D is wrong. An ordinary resolution is required to remove a director. Only copies of special resolutions need to be sent to Companies House.
A solicitor acts for a client who is a minority shareholder in a private limited company and is considering entering into a shareholders’ agreement with the other two shareholders. The client is a director of the company as are the other two shareholders. It is proposed that the shareholders’ agreement will contain a provision that none of the parties to the agreement will vote for the removal of the others as directors of the company.
Which of the following statements best explains why the client should enter into the shareholders’ agreement?
A. The shareholders’ agreement binds all present and future shareholders of the company and provides a remedy for your client if one of its terms is breached.
B. The shareholders’ agreement binds all of the parties to the agreement and provides a remedy for your client if one of its terms is breached.
C. The shareholders’ agreement must restrict shareholders who are also directors from voting in a particular way in a board meeting and so protect the client’s interests.
D. The shareholders’ agreement will protect the client absolutely from being removed as a director as it requires the other shareholders to vote against a resolution to remove the client from office as a director.
E. The shareholders’ agreement must be filed with the Registrar of Companies with a view to protecting the interests of minority shareholders who are a party to it.
Option B is the best answer because a shareholders’ agreement only binds those shareholders who are parties to the agreement and provides a remedy for the client if any of the terms are breached.
Option A is wrong because, although a shareholders’ agreement will provide a remedy for the client if any of the terms are breached, it only binds those who are a party to it.
Option C is wrong because a shareholders’ agreement must not restrict shareholders who are also directors from voting in a particular way at board meetings as this could lead to a breach of directors’ duties.
Option D is not the best answer because, whilst there will be a breach of the shareholders’ agreement should the other parties vote for the removal of the client as director, the agreement does not prevent them from doing so. The client could seek an injunction as a remedy for breach of the agreement but an injunction is a discretionary remedy and so cannot be guaranteed.
Option E is wrong because a shareholders’ agreement is a private document and will not be filed with the Registrar of Companies.
The directors of a private limited company intend to sell a property which the company owns. The buyer is the mother of one of the directors. The three directors of the company are also the only shareholders, each holding a third of the shares. It has been agreed that the sale price of the property will be £95,000. The most recent audited accounts of the company show that net profits are £860,000 and net assets are £900,000. The company’s constitution is the Companies (Model Articles) Regulations 2008 without amendment.
Does the proposed transaction require shareholder approval?
A. No, because the property is not being sold to a director of the company.
B. Yes, because the transaction involves the sale of a property with a value which exceeds 10% of the company’s net profit value to a person connected with a director.
C. Yes, because the transaction involves the sale of a property with a value which exceeds 10% of the company’s net asset value to a person connected with a director.
D. No, because the price of the transaction does not exceed £100,000.
E. No, because the directors have general authority to run the day to day business of the company.
Option C is correct because the transaction is a substantial property transaction as it involves:
* the sale of a non-cash asset (the property);
* of substantial value because the value exceeds 10% of the company’s net asset value (the sale price is £95,000 which exceeds £90,000, i.e. 10% of the company’s net asset value of £900,000);
* to a person connected to a director (the director’s mother (ss.252 and 253 Companies Act 2006).
and so needs approval by an ordinary resolution of shareholders (s.190 Companies Act 2006).
Option A is wrong because the property is being sold to a person connected to a director and is therefore still caught by the legislation. The definition of a connected person includes the director’s family members (s.252(a) Companies Act 2006) and the definition of family members includes the director’s parents (s.253(2)(e) Companies Act 2006).
Option B is wrong because even though the value of the transaction is less than £100,000, it will still be classed as substantial as its value exceeds 10% of the company’s asset value, not 10% of the company’s net profit value. (s.191(2) (a) Companies Act 2006).
Option D is wrong because where the price of the transaction does not exceed £100,000, the transaction will still be classed as substantial if its value exceeds 10% of the company’s net asset value (ss.191(2)(a), 191(3)(a) Companies Act 2006).
Option E is wrong – the general authority of directors set out in the company’s articles does not apply to this situation as it is a substantial property transaction and therefore needs approval by ordinary resolution of the shareholders (s.190 Companies Act 2006).
The board of directors of a private limited company is proposing to grant a service contract for a guaranteed term of three years to a new director. The three year term of the contract requires the prior approval of the shareholders by ordinary resolution. The company has a total issued share capital of £200,000 divided into 200,000 ordinary shares of £1 each.
There are four shareholders with the right to vote, a man, his sister, his son and his daughter: the man has 40,000 shares; his sister has 60,000 shares (but will be abstaining from the vote); his son has 50,000 shares; and his daughter has 50,000 shares. The company has adopted Model Articles for private companies limited by shares (unamended) as its articles of association.
The board propose to use the written resolution procedure to pass the ordinary resolution.
Which of the following statements best describes whether the ordinary resolution will be validly passed?
A. Shareholders holding at least 5% of the voting rights must agree to the use of the written resolution procedure before the ordinary resolution can be validly passed.
B. All of the shareholders, including the sister, must vote before the resolution can be passed.
C. Only the son and daughter need to vote in favour before the deadline for the ordinary resolution to be validly passed.
D. The required majority of members must signify their agreement within the deadline of 14 days after the circulation of the written resolution for the ordinary resolution to be validly passed.
E. The man, his son and his daughter must vote in favour before the deadline for the ordinary resolution to be validly passed.
Option E is the correct answer. For the ordinary resolution to be passed using the written resolution procedure, the required majority is more than 50% of the total voting rights of the eligible members, including the sister. The total voting rights of eligible members is 200,000 (including the votes of the sister). Therefore, only if the man, his son and his daughter vote in favour, will the resolution be passed.
Option A is wrong because, whilst members holding 5% or more of the total voting rights can require the circulation of a written resolution, they do not have to agree to the board’s proposal to use the written resolution procedure.
Option B is wrong because the ordinary resolution will pass once eligible members holding more than 50% of the total voting rights signify their agreement.
Option C is wrong because the son and daughter have only 50% of the total voting rights of eligible members.
Option D is wrong because the deadline (or the lapse date) will be 28 days after the written resolution is circulated beginning with the date of circulation. The company has adopted the Model Articles without amendment, and the Model Articles do not provide for any different period.
A director of a company is not married or in a civil partnership but has lived with his partner for 10 years. He has a sister. His father died several years ago. The director’s mother and grandfather have lived with the director since the father’s death.
Which one of the following most accurately describes who would be a person connected to the director for the purposes of deciding whether shareholder approval is required for a substantial property transaction?
A. The director’s partner only.
B. The director’s partner and his sister.
C. The director’s partner, his sister and his mother.
D. The director’s partner and his mother.
E. The director’s partner, his mother and his grandfather.
Option D is correct. Shareholder approval for a substantial property transaction is only required if the transaction involves a director or a person connected to a director. Connected persons include the following members of a director’ family: their husband, wife or civil partner or partner with whom they have an ‘enduring relationship’, parents, children (and step-children) (ss.252 and 253 CA 2006). The director’s partner and his mother are therefore connected persons.
Options A, B and C are therefore wrong. A civil partner is a connected person but wider family such as brothers and sisters are not connected persons.
Option E is wrong. Grandparents who live with a director are specifically excluded (s.253(3) CA 2006).
A company is proposing to enter into a contract to sell a storage unit to one of its directors. The storage unit is valued at £80,000.
Following the sale, what must be filed at Companies House?
A. The shareholders’ resolution approving the sale.
B. The shareholders’ resolution approving the sale, a memorandum of the terms of the sale agreement and a fee.
C. The shareholders’ resolution approving the sale, Form SPT1 and a fee.
D. There are no documents that need to be filed.
E. It will depend on the asset value of the company.
Option D is correct. It is not certain from the facts whether or not this transaction would amount to a substantial property transaction requiring an ordinary resolution of the shareholders (s190 Companies Act 2006). Although this is a sale of a non-cash asset to a director, it is not clear whether this is a substantial non-cash asset. Although the storage unit is worth less than £100,000 (s.191(2)(b), to determine this it would be necessary to know the net asset value of the company, or if no statutory accounts have been prepared, the amount of the company’s called up share capital of the company (s.191(3). However, even if it were a substantial property transaction, there would be no related filing needed at Companies House.
Options A, B and C are wrong because, even if this was a substantial property transaction which required authorisation by an ordinary resolution of the shareholders, the resolution would not need to be filed at Companies House. There is therefore no associated fee. A substantial property transaction does not require the preparation of a memorandum of the terms of the sale agreement. Form SPT1 does not exist.
Option E is wrong because whilst the asset value is relevant to determining whether or not the transaction is a substantial property transaction, as explained above, it is not relevant in determining what documents need to be filed at Companies House.
A private company is proposing to make a loan of £25,000 to the one of its directors. He will use the loan to buy a car for his husband.
Which of the following statements best reflects the position in relation to authorisation of the loan by the shareholders?
A. The shareholders must approve the loan by passing an ordinary resolution.
B. The shareholders must approve the loan by passing a special resolution.
C. Shareholder approval is not required as lending money is within the general power of the directors.
D. Shareholder approval is not required as the loan is below £50,000.
E. Without shareholder approval for the loan, the transaction will be void and the director must repay the loan immediately.
Option A is correct. Under s.197 CA 2006, shareholder approval by ordinary resolution is required for a loan to a director.
Options B is therefore wrong.
Option C is wrong. A loan contract would normally fall under the directors’ general power, but not if the loan is made to a director (as above).
Option D is wrong. A director can borrow up to £50,000 if the purpose of the loan is to enable a director to properly perform his duties, otherwise the limit is £10,000. This is not a loan for business purposes.
Option E is wrong. If shareholder approval is not obtained, the transaction is voidable at the instance of the company.
A company has three directors and five shareholders (none of whom are directors). At a recent board meeting, the directors of a private company agreed to enter into the following transactions:
The sale of office premises for £200,000 to the wife of the Managing Director;
A loan of £250,000 to the husband of the Finance Director;
A payment of £30,000 to the Sales Director on his retirement next month;
The award of a six-year fixed term service contract to the Marketing Director.
Shareholder consent was not obtained for any of the transactions but the directors know that all of the shareholders approve of these transactions.
Which of the following statements best reflects the position in relation to affirmation of these transactions?
A. The sale of the office premises to the Managing Director’s wife may be affirmed by the shareholders or it will be voidable at the option of the company.
B. The loan to the Finance Director’s husband must be affirmed by the shareholders or it will be voidable at the option of the company.
C. The payment of £30,000 to the Marketing Director may be affirmed by the shareholders to prevent the directors from being personally liable to repay the £30,000 to the company.
D. The service contract is void and cannot be affirmed by the shareholders.
E. None of the transactions can be affirmed as the unanimous consent of the shareholders is required to do so.
Option A is correct. The transaction is a substantial property transaction (SPT) and will be voidable as shareholder approval has not been obtained. However, under s.196, shareholder may affirm a SPT by ordinary resolution. Four out of the five shareholders approve, so this will be possible.
Options B is wrong. A loan to a member of a director’s family does not require shareholder approval, and so there is no need for affirmation.
Option C is wrong. There is no provision in the Companies Act 2006 allowing a payment for loss of office to be affirmed, so the directors will be personally liable to repay the sum as shareholder approval has not been obtained.
Option D is wrong. Only the provision in the service contract granting the fixed term is void. The remainder of the contract is valid. There is no provision in the Companies Act 2006 allowing a the fixed term provision to be affirmed.
Option E is wrong. Loans and SPT’s can be affirmed by ordinary resolutions (as above). Unanimous consent is not required.
A private limited company has five shareholders, a builder, a decorator, painter, an electrician, a carpenter and a plumber, all of whom are also directors of the company. Their shareholdings are as follows:
The builder has 30,000 shares.
The electrician has 30,000 shares.
The decorator has 10,000 shares.
The carpenter has 20,000 shares.
The plumber has 10,000 shares.
The company has one class of ordinary £1 voting shares. It has adopted the Model Articles for private companies limited by shares unamended.
The company is considering a proposal to loan £25,000 to the builder. The carpenter and the plumber support the builder and will vote for the proposal. The decorator and the electrician are against the proposal.
A fortnight ago, the directors of the company circulated a written resolution in order to obtain the necessary shareholder approval to the terms of the loan agreement. The builder and the carpenter have returned the written resolution, signifying their consent. The decorator and the electrician have told the board that they will not vote on the proposal. The plumber is away and has not yet returned the resolution.
Which of the following statements best describes whether the resolution has passed?
A. A majority of 75% of the votes of all the eligible shareholders is required to pass the necessary resolution, so it cannot pass.
B. In view of the fact that the electrician and the decorator will not be voting on the resolution, it has received sufficient votes for it to pass.
C. As the builder has an interest in the matter, his votes will not count so the resolution cannot pass.
D. The lapse date has not passed so the board must wait until then before they can resolve to enter into and execute the loan agreement.
E. The resolution will not pass until the plumber returns the resolution signifying his agreement.
Option E is the correct answer. An ordinary resolution of the shareholders is required to approve a loan to a director (s197 Companies Act 2006 (CA06)). This requires more than 50% of the eligible members to vote in favour so the votes of the plumber are needed to pass the resolution.
This makes Option A wrong.
Option B is wrong as the builder and the carpenter have exactly 50% of the votes, which is not sufficient for the resolution to pass. Note that the percentage is calculated on the total number of eligible voting shares, not on the number of votes cast.
Option C is wrong. There are no restrictions on a shareholder voting in favour of a personal loan, even though they have an interest in the loan, so the builder is an eligible member as he is entitled to vote.
Option D is wrong because as soon as a simple majority of the votes of all eligible members are received, the resolution will pass, whether or not the lapse date has passed. Note that there is no concept of voting against a written resolution, so it makes no difference that the electrician and the decorator will not vote.
A private limited company has five shareholders, a lawyer, a banker, a teacher, a doctor and a dentist. They hold the following numbers of ordinary shares:
The lawyer: 20
The banker: 35
The teacher: 10
The doctor: 10
The dentist: 25
The company has adopted Model Articles for private companies limited by shares (unamended) as its articles of association.
The company proposes to amend its articles. A written resolution was circulated to the five shareholders, who were all eligible members, on 1 March.
Four shareholders signed and returned copies of the resolution to signify their agreement to it. These were received by the company on the following dates:
The lawyer: 14 March
The banker: 19 March
The teacher: 27 March
The doctor: 30 March
The dentist did not return his copy of the resolution.
When, if at all, was the resolution passed?
A. 19 March.
B. 27 March.
C. 28 March.
D. 30 March.
E. The resolution was not passed.
Option E is the correct answer because the resolution was not passed. A special resolution is required to amend the articles. For a special resolution to be passed by written resolution, it must be passed by members representing not less than 75% of the total voting rights of eligible members. It therefore required 75 votes in favour, which must have been received before the end of the lapse date; they therefore needed to have been received by the end of 28 March. At that point in time, only 65 out of 100 votes (65%) had been received in favour. The doctor’s vote was too late.
Option A is wrong because by 19 March 55% of the total voting rights had been cast in favour. A special resolution passed by written resolution requires 75% of the total voting rights to be cast in favour.
Option B is wrong because by 27 March 65% of the total voting rights had been cast in favour. As mentioned above, a special resolution passed by written resolution requires 75% of the total voting rights to be cast in favour.
Option C is wrong because by 28 March, the lapse date, only 65% of the total voting rights had been cast in favour. This is insufficient to pass a special resolution by written resolution.
Option D is wrong because the written resolution lapsed on 28 March.
A company has Model Articles for private companies limited by shares unamended.
Which one of the following statements best reflects the position in relation to the payment of dividends by the company?
A. The directors can declare the amount of a final dividend at a board meeting.
B. The directors do not have authority to pay an interim dividend without the approval of the shareholders.
C. The shareholders declare a final dividend by passing a special resolution but may only do so if the directors have made a recommendation.
D. Once a final dividend has been declared, it must be paid to the shareholders.
E. If an unauthorised dividend is paid to the shareholders, the shareholders may be required to repay it but the directors will not be personally liable.
Option D is correct. Once declared, a final dividend [but not an interim dividend] becomes a debt of the company owed to the shareholders.
Options A is wrong. The directors recommend the amount of the final dividend, but it is the shareholders who will declare the dividend.
Option B is wrong. The directors have the power to pay interim dividends without the approval of the shareholders.
Option C is wrong. A dividend is declared by passing an ordinary, not a special, resolution.
Option E is wrong. The statement is partly correct – shareholders who knew or ought to have known that the dividend was unauthorised will be required to repay it. Under the common law, if the directors knew or ought to have known that the dividend was unauthorised, they will be liable to repay it.
A company has Model Articles for private companies limited by shares unamended.
Which of the following breaches of duty of the directors of the company may be authorised by the board in advance?
A. Breach of the directors’ duty to exercise their powers for their proper purpose.
B. Breach of a director’s duty to promote the success of the company.
C. Breach of a director’s duty to avoid a conflict of interest with the company.
D. Breach of a director’s duty not to accept a benefit from a third party.
E. Breach of a director’s duty to declare an interest in a proposed transaction with the company.
Option C is correct. Under s.175(4) CA 2006, the directors of a private company can authorise a conflict of interest with the company, provided that there is nothing to the contrary in the company’s articles (the company has Model Articles for private companies so this is the case) and authorisation is given in advance. Note that the director in conflict cannot count in the quorum or vote on the authorisation.
The other options are all wrong. There are no equivalent provisions for breach of any of the other duties to be authorised by the directors.
Do not confuse the s.175(4) exception with s.180(4) which allows the members to authorise transactions involving a conflict which could conflict with the company’s interest or for a conflict to be authorised by the articles.
The client is the managing director of a construction company which needed to renew its fire insurance to cover equipment in its storage unit. The renewal application was made using the company’s insurance broker, who had handled the company’s insurance affairs without problems for five years.
The insurance broker e-mailed the insurance application form to the client. As she was busy and the matter was urgent, she did not read the form, but printed it out and signed it and sent it back to the insurance broker, asking him to complete it, trusting the insurance broker to fill the form out correctly. Unfortunately, the insurance broker gave an inaccurate answer to one of the questions on the form which was sent to the insurance company.
Last week a fire broke out in the construction company’s storage unit, destroying its equipment. Due to the inaccurate answer given by the broker on the application form the insurance company was entitled to refuse to pay out under the policy.
Is the client in breach of her duty to act with reasonable care, skill and diligence by delegating the matter to the insurance broker?
A. Yes, because the client could not have honestly believed that she was promoting the success of the company.
B. Yes, because a reasonably diligent managing director would not sign an insurance form without reading it.
C. No, because it was reasonable for the client to rely on the insurance broker’s expertise.
D. No, because busy directors often sign forms without reading them so on an objective test the client had met the required standard of care.
E. No, because on a subjective test, the client had met the required standard of care.
Option B is the correct answer. Applying an objective test, a person with the general knowledge, skill and experience can reasonably expect that a managing director would not sign an insurance form without reading it at all.
Option A is wrong. Honest belief is not relevant in deciding whether there has been a breach of the duty to act with care, skill and diligence under s.174 of the Companies Act 2006.
Option C is wrong. Again, on an objective test, a reasonable director would not have relied simply on the insurance broker. Delegating a matter is permissible but failing to participate or supervise is not.
Option D is wrong. Although, in real life, busy directors may often sign forms without reading them thoroughly, that does not necessarily mean that it is reasonable to do so. That is an abrogation of responsibility.
Option E is wrong. The subjective test is relevant where a director has some special skill or expertise. On these facts, the subjective test is not the relevant test, since the client had no special skill/knowledge/experience in relation to the insurance application process. In any event, s.174 requires the client to meet the required standard both on an objective and a subjective test.
Which of the following statements best reflects the position in relation to the ‘general duties’ of directors contained in Sections 171 to 177 of the Companies Act 2006?
A. The general duties only apply to properly appointed (‘de jure’) executive directors.
B. The general duties of the directors are owed to the company and each of its individual shareholders.
C. The general duties include the duty to declare an interest in an existing transaction with the company.
D. Before a breach of any of the general duties has occurred, it may be authorised by the board of directors.
E. Where a breach of any of the general duties has occurred, the breach may be ratified by a resolution of the shareholders.
Option E is the correct answer. Under s.239 CA 2006, the shareholders may by (ordinary) resolution usually ratify a breach of duty (as well as negligence, default or breach of trust) once it has occurred. [Note the wording is ‘may be ratified’ – not all breaches can be ratified, e.g. if there is fraud or a bribe under s.176.]
Option A is wrong. The duties are not only owed by formally appointed (de jure) executive directors but other persons, e.g. non-executive, directors. The position is less clear in relation to de facto and shadow directors, but they may too be liable.
Option B is wrong. The the duties are owed to the company and not the shareholders.
Option C is wrong. The duty to declare an interest in an existing transaction (s.182) is not one of the ‘general’ duties in ss.171 – 177 although the rules are similar to the duty to declare an interest in a proposed transaction in s.177.
Option D is wrong. Authorisation (which must take place before a transaction occurs where a conflict arises) is limited to s.175.
A client has been the sales director of a successful technology company which he set up with five other directors ten years ago. The company has Model Articles for private companies limited by shares without amendment.
The client’s sister recommended an investment scheme run by an offshore company, of which her husband is a director, claiming that the scheme offered a very attractive guaranteed return of 15%. Without conducting any further research or telling them of his connection to the offshore company, the client recommended the scheme to his fellow directors. The directors agreed to invest £100,000 relying only on the client’s recommendation.
Six months’ later the offshore company has gone into liquidation and the technology company has lost its investment.
Which one of the following statements best explains the liability of the client and his fellow directors for breach of their duties as a director?
A. As the company is a technology company, the investment was ultra vires, so all the directors are in breach of their duty to act within their powers.
B. As the client’s experience is in sales, he will not be liable for breach of his duty to exercise reasonable, care skill and diligence.
C. The client is in breach of his duty to declare his interest in the proposed transaction, but no other duties.
D. The client is in breach of his duty to declare his interest in the proposed transaction and his duty to declare his interest in an existing transaction.
E. The client will be in breach of his duty to avoid a conflict of interest.
Option D is the correct answer. By not disclosing his interest at the time of the transaction, the client has breached his duty to disclose an interest in the proposed transaction (s.177). Once the company entered into the transaction, the client would be breach of his duty to disclose his interest in an existing transaction (s.182).
Option A is wrong. The company was set up ten years ago under the Companies Act 2006 and so the ultra vires rule will not apply.
Option B is wrong. The client (and all the other directors) may be liable for breach of the duty under s.174 to act with reasonable care, skill and diligence by investing a large sum of money without fully investigating the scheme. It is irrelevant that the client’s experience is in sales. It would be reasonable to expect any director to investigate an offshore investment scheme before investing a large sum of money. With ten years’ experience as a director, the subjective as well as the objective standard expected would be high.
Option C is wrong. The client is in breach of his duty to declare an interest in a proposed transaction. Failure to disclose the interest may also amount to a breach of s.172, and it is likely that the client is in breach of his duties under ss.174 and 182 (as above). (Note that breach of s.174 would not in itself would be a breach of the s.172 duty to promote the success of the company, if the directors honestly believed that the scheme was in the best interests of the company).
Option E is wrong. The duty to avoid conflicts of interest does not apply to a conflict of interest arising in relation to a transaction with the company. (s.175(3)).
A client and his daughter are the only two directors of a successful company. Between them, they own 60% of the shares in the company. The remaining shares (40%) are owned by three other shareholders. The company has Model Articles for private companies limited by shares unamended.
All the shareholders want the company to expand its activities. To do so, the directors propose to borrow £5 million from the bank.
The other shareholders consider that taking on substantial borrowings is risky and want to raise money by issuing new shares. The directors are against this because they wish to retain control of the company and they cannot afford to subscribe for new shares.
Which one of the following statements best reflects the position of the directors in relation to financing the expansion?
A. In deciding to borrow the money rather than issue shares, the directors are exercising their power to borrow for an improper purpose.
B. The directors may go ahead with the loan ignoring the objections of the other shareholders, because borrowing money is within their general powers.
C. In borrowing the money, the directors would breach their duty to promote the success of the company and the other shareholders could bring an action for breach of duty,
D. Borrowing a large sum of money is incompatible with their duty to have regard to the interests of the creditors of the company.
E. The interests of the directors will conflict with the interests of the company and so they cannot go ahead with the loan.
Option A is the correct answer. Although the directors do have the power to borrow and give security under the Model Articles, that power, like all directors’ powers and authority, must be exercised for the proper purpose, and borrowing a large amount in order to retain control is likely to be an improper purpose (s.171(1)(b)).
This makes Option B wrong.
Option C is wrong. If the motive of the directors is to retain control, it may be arguable, that they are in breach of their duty under s.172 of the Companies Act 2006 to promote the success of the company but it is the company not the shareholders that must bring an action.
Option D is wrong. Under s.172 there is no requirement for the directors to have regard to the interests of the creditors unless the company is insolvent. The company is ‘successful’ so there is no suggestion of this.
Option E is wrong because the duty to avoid a conflict of interest does not apply to transactions with the company.
A company carries on business as an importer and retailer of cars manufactured in Italy. It is aware that a franchised car dealership is up for sale. After discussions at board level, the consensus amongst the directors is that the dealership is not a suitable target. One of the directors mentions this opportunity to his sister, who decides to investigate further whether or not she would like to purchase the dealership.
Which of the following best explains whether this director is in breach of any duty owed to the company?
A. There is a possibility that the director is in breach of his duties to the company because he is not exercising reasonable care and skill by mentioning the business opportunity to his sister.
B. There is a possibility that the director is in breach of his duties to the company because he is not exercising independent judgment by mentioning the business opportunity to his sister.
C. There is a possibility that the director is in breach of his duties to the company because he is putting himself in a position of potential conflict by providing his sister with the information to exploit the business opportunity.
D. There is a possibility that the director is in breach of his duties to the company, because he is not promoting its success by mentioning the business opportunity to his sister.
E. There is no possibility that the director is in breach of his duties to the company because the situation cannot be reasonably regarded as likely to give rise to a conflict of interest.
Option C is correct. Directors must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company (s 175 of the Companies Act 2006). The duty to avoid a conflict applies in particular to the exploitation of any property, information or opportunity and it is immaterial whether the company could have taken advantage of the opportunity but decided not to do so.
Options A, B and D set out other duties that directors owe their companies, but none are relevant here on the facts.
Option E is wrong as although it relates to the duty of a director not to put themselves into a position where there is a conflict of interest, it is not clear, without more facts, that this is a situation where it cannot reasonably regarded as likely to give rise to a conflict of interest and thus it cannot be said with certainty that the director is not in breach of his duties.
A private limited company is interested in purchasing a piece of land to further its expansion plans. The land is owned by one of the company directors but only some of the other directors are currently aware of this. The proposed purchase is to be discussed at the next board meeting of the company.
The company’s articles of association are the Model Articles for private companies limited by shares with one amendment. This provides that directors may vote and count in the quorum on matters in which they are interested. None of the directors are shareholders in the company.
Which of the following best describes the position of the land-owning director in relation to the proposed purchase of the land?
A. As some of the other directors know that the director owns the land, he will not need to declare his interest in the purchase at the forthcoming board meeting.
B. The purchase must be formally authorised by the other directors so that the land-owning director, by entering into this transaction with the company, is not in breach of the duty to avoid a situation in which he has a direct or indirect interest which conflicts with the interests of the company.
C. As the company’s articles of association include a special article allowing directors to vote and count in the quorum if they are interested in a matter, the director does not have to declare his interest in the purchase to the other directors.
D. The director will be guilty of a criminal offence if he does not declare his interest in the purchase to the other directors.
E. The director must declare the nature and extent of his interest in the purchase to the other directors to avoid being in breach of duty.
Option E is correct because the director must declare his interest in the purchase as it represents a proposed transaction with the company (s177 CA 2006).
Option A is wrong because all the other directors would need to know that the director owns the land, or ought reasonably to be aware of this. The facts say that some of the directors do not know (s177(6)(b) CA 2006). In any event, it is best practice to declare the interest to the other directors.
Option B is wrong because the duty to avoid a situation where the director has an interest which conflicts directly or indirectly with the interests of the company does not apply to transactions with the company (s175(3) CA 2006). Such transactions are covered by the duty to declare an interest in the proposed transaction to the other directors (s177 CA 2006).
Option C is wrong because the special article relates to whether directors can count in the quorum and vote on a resolution they have a personal interest in. It is not relevant to whether they have to declare that interest.
Option D is wrong because criminal liability does not arise from a breach of the duty to declare an interest in a proposed transaction with the company, only breach of duty to declare an interest in an existing transaction.
What is the ‘proper claimant’ rule?
A. Where a wrong has been done to a company, the members may unanimously agree to bring a claim on behalf of the company.
B. Where a wrong has been done to a company, any member who has suffered loss may bring a claim on behalf of the company.
C. Where a wrong has been done to a company, any member or director who has suffered loss may bring a claim on behalf of the company.
D. Where a wrong has been done to a company, only the company can bring an action.
E. Where a wrong has been done to a company, any affected person acting in good faith in the interests of the company, can bring a claim on behalf of the company.
Option D is correct. The legal rights of the company as a separate legal person belong to the company and not to the members. This means that only the company can bring an action for a wrong, for example, breach of duty or negligence by the directors.
This makes Options A - C and E wrong. Neither individual directors nor the members (nor other affected parties) have the standing to do so, even if they have suffered loss. This applies even if a majority, or even all, of the members support a claim.
Note that a member (or members) may be able to bring a derivative action but this is an exception to the proper claimant principle: it is not the principle itself.
