Business law III Companies and Directors' duties

Question 1

Discuss wrongful trading

Answer 1

Wrongful trading is a claim that at some time before a company became insolvent, the directors knew or ought to have known that there was no reasonable prospect that the company would avoid insolvency and failed to take adequate steps to minimise the losses to the company’s creditors. If the directors vote themselves a pay rise after being told the company was becoming insolvent, they did not act reasonably to minimise the company’s losses

Question 2

minimum number of director in a private company/public company

statutory minimum shareholding for a private and public company

Answer 2

1, no requirement - a private company

2, at least 50,000 - a public company

Question 3

Who are the promoters for the purposes of company formation

Answer 3

since company technically does not exist before the registration, someone still has to go about arranging for investors and registration to bring the company into existence. Those people are called promoters.

Promoters owe a fiduciary duty to the company.

Promoters can enter into contracts on behalf of the company but still be personally responsible even after the formation of the company.
(3)

Question 4

What is a memorandum of association?

Answer 4

A memorandum of association is a statement authenticated/signed by persons wishing to become members of the company. The subscribers express their intention to form the company and become members.

Question 5

How can promoters protect themselves from personal liability arisen before the formation of the company?

(4)

Answer 5

Prepare the contract in draft and do not sign before the company is registered

entering into a novation agreement after the company is incorporated (rare)

assigning the benefit of the pre-incorporation contract in exchange for the company’s agreement to indemnify the promoter for any liability to the other contracting party

Using a shelf company

Question 6

What is a shelf company

Answer 6

Companies that are pre-incorporated, but have never traded. that promoter can simply purchase and take over by changing basic details like the members.

Question 7

Restriction on company name

Answer 7

It cannot be a name that is deemed offensive

Approval is required for a name that suggests any connection to Government or local authority

Approval is required for a name that contains any sensitive words, such as Auditor, Chartered, Law Commission, or Medical Centre

Question 8

What is the constitution of a company?

Answer 8

A company’s constitution is simply its articles of association plus any resolutions or agreements adopted by the members to amended its articles of association. if there isn’t one draft by the company, the modal article will automatically apply.

Question 9

Objects of the company and its importance in director’s duties

Answer 9

The articles can restrict the objectives of the company. The directors have a duty to adhere to the restriction. if not, they may be subject to an injunction preventing the restricted action if it has not already carried out or an equitable action by the company for any damage caused.

Question 10

What provisions cannot be provided in the article of association? (2)

Answer 10

The articles cannot contain a provision that requires unanimous consent to change the constitution as the Companies Act does not permit that. Change can only be effected with a special resolution.

that requires a shareholder to increase their liability to the company/subscribe for more shares.

Question 11

Meaning of entrenchment

what articles in the Articles of association can be entrenched (4)

Answer 11

entrenchment means requiring a more onerous process for alteration than those required for a special resolution.

entrenchment article can only be made at formation or by a special resolution

entrenchment must be made known to the Registrar by notice

entrenchment can not be so onerous that further change is made an impossibility

Question 12

Wednesbury principle in the article of association

Answer 12

if an alteration is so unreasonable that no reasonable person would consider being for the benefit of the company. shareholder in dissent can apply for an objection in court. the court can set the alteration aside.

Question 13

When would the court lift or pierce the veil of incorporation? (3)

Answer 13

Fraudulent and wrongful trading - if a director causes the company to trade while knowing the company is insolvent, the director may be charged with the civil offence

If a PLC trades without a trading certificate

To avoid existing obligations (such as moving assets to a company to keep them out of the hands of a creditor)

Question 14

How can a director be appointed?

Answer 14

by a simple majority or by a decision of the directors

Question 15

Who is a de facto director

Answer 15

A de facto director is someone who has not been formally appointed and registered but carries out all the duties and behaves as a director

Question 16

Who is a shadow director

Answer 16

A person who regularly influences the acts of a company’s directors may be considered a shadow director, whose directions and instructions the directors of the company are accustomed to act. A disqualified director could be one.

The companies act 2006 treats shadow directors the same as de facto or de jure directors. Advisors are excluded from the definition of a shadow director.

Question 17

Who is an alternate director

and a nominee director

Answer 17

An alternate director is someone appointed by a director to attend and vote at board meetings when the director is absent.

A nominee director is appointed to the board to represent the interests of a particular stakeholder, usually a shareholder. a nominee director is a de jury director

Question 18

Powers of director must be performed in what manner?

Answer 18

Must act as a board - powers must be exercised collectively

Question 19

What are the decisions that require shareholder approval?

What are decisions are reserved to shareholders?

Answer 19

Decisions that allow the shareholders to approve a transaction in which a director has a financial interest - ex. offering a job offer to a director for longer than 2 years

for example: changing the articles requires a special resolution

Question 20

Directors’ duties to a company

Directors’ liability

Answer 20

Basic fiduciary: act in good faith and for the success for the business

Any provision in the articles or a contract that purports to exempt a director for liability that would otherwise attach to the director for breach of duty, negligence, or breach of trust in relation to the company. there is an insurance product to indemnify those breaches except regulatory and criminal fines

Question 21

Directors’ duties to a company

duties that extend beyond the term

Answer 21

A person who was a director may not exploit property, or information, or opportunities of which the director became aware while a director

Question 22

Directors’ duties to a company

Duty to act within power

Answer 22

A director must act in accordance with the company’s constitution and exercise powers only for the purposes for which they are conferred

Question 23

Directors’ duties to creditor

Answer 23

if the company is on the brink of being insolvent or insolvent, the directors’ duties are to the creditors instead of the shareholders

Question 24

Meaning of enlightened shareholder value according to Companies Act 2006

Answer 24

apart from the financial success of the companies, directors should consider:

long term consequence;
employees;
other stakeholders;
environment;
reputation for high standards of business conduct;
fairness

Question 25

Directors’ duties to a company

Avoiding conflicts of interest

Answer 25

A director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts or possibly may conflict, with the interests of the company

no duty is breached if the conflict of interest relates to

1) a transaction with the company itself and the board knows the director has an interest
2) the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or

(3) the matter has been authorised by the directors

Question 26

Directors’ duties to a company

Not to accept benefits from Third Parties

Answer 26

A director is not allowed to accept a benefit from a third party conferred by reason of being a director. However, there is an exception to this rule where the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 27

Specific rules about the director approving RELATED transaction or arrangement

Answer 27

If a director is in any way, interested in a proposed transaction or arrangement with the company, or becomes interested in an existing transaction. they must give the other directors notice of the interest before entering into, or continuing with the transaction or arrangement.

The director interested in an actual or proposed transaction with the company usually cannot form the quorum on that decision

Exception if the transaction is unlikely to give rise to a conflict of interest, the other directors are aware of it, or it concerns terms of the director’s service contract that have been or are to be considered by the board of directors

Question 28

Rules on loan to directors

Answer 28

A company may not make a loan to a director or guarantee or give security for a loan to a director by a third party unless the transaction has been approved by the members of the company.

Question 29

Define quorum and the rule on convening a meeting

Answer 29

the number of directors who must participate to make the meeting valid.

it must be no less than two. if a director has a personal interest in a matter, they may be prevented from counting in the quorum

Question 30

Rules on passing a written resolution

Answer 30

Directors can pass written resolutions without holding a meeting. However, if this process is used, the resolution is considered approved only if all the directors approve it rather than a majority.

Question 31

The process to remove a director or the situation where a director may be disqualified

Answer 31

The power to remove a director is given to the shareholders under the Companies Act 2006 and is carried out by way of a simple majority vote.

This cannot be exercised by a written resolution and usually cannot be overridden.

Removal of a director may trigger payments to compensate for loss of office and damages for termination of the service contract

move to remove a director must give the company a formal notice at least 28 before a general shareholders’ meeting. Director has the right to make a written representation and to speak at the meeting

Question 32

Explain the Bushell v Faith clause

Answer 32

it is a clause that may limit the shareholders’ removal power which gives weighted voting to a director who is also a shareholder in the event of a resolution to remove a director

Question 33

Explain disqualification under the Company Directors Disqualification Act 1986 (CDDA)

(5)

Answer 33

A director may be disqualified under this heading:

conviction of an indictable offence in connection in the general management or winding up of the company

Persistent breaches of companies’ legislation requiring any return, account or other documents

Fraud (fraudulent trading)

Summary conviction of an offence in contravention of any provision of the companies’ legislation requiring a return, account or other documents.

Unfit - may be disqualified for 2 - 15 years (wrongful trading under Insolvency Act 1986, being an undischarged bankrupt)

Question 34

Rules on audit for companies

Answer 34

The act requires large companies to hire a specialist accountant known as an auditor. companies with turnover less than 10M and fewer than 50 employees do not require auditing