Chapter 5: Companies - Directors and Officers

Question 1

What are directors?

Answer 1

Officers of the company + are responsible for the day-to-day management of the company.

Question 2

What must be considered when deciding whether someone is acting as a director?

Answer 2

Important to consider their function rather than their title.

Question 3

How many directors does a company need?

Answer 3

Private company - must have at least 1 director

Public company must have at least 2 directors + at least 1 of them must be a natural person, at least 16 years of age.

Question 4

Who are the first directors of a company?

Answer 4

Those specified on the registration documents on incorporation

Question 5

What is the procedure for appointing new directors?

Answer 5

Appointment provisions for subsequent/new directors are typically found in the company’s articles.

Model articles for a company limited by shares –> a director can be appointed by an ordinary resolution of the shareholders OR by a decision of the directors.

Often, this second model articles provision will be modified to require approval of the appointment by the shareholders at their next meeting.

Question 6

What are the different types of directors?

Answer 6

1. De jure directors
2. De facto directors
3. Shadow directors
4. Executive + non-executive directors
5. Alternate director
6. Nominee director

Question 7

What notice is required when new directors are appointed?

Answer 7

The company must notify the Registrar of Companies within 14 days of any new director appointments and of any changes to the details (e.g., their address) of existing directors

Question 8

What is a de jure director?

Answer 8

A director who has been formally and properly appointed + registered as such with the Registrar of Companies at Companies House.

Private company must have at least 1
Public company must have at least 2

Question 9

What is a de facto director?

Answer 9

Someone who has not been formally appointed + registered with the Registrar of Companies but who carries out all the duties of and behaves as a director.

Such a person is held out as a director by the company, and claims to be a director, despite the fact that they have never actually been appointed as such.

Question 10

What are shadow directors?

Answer 10

A person who regularly influences the acts of a company’s directors may be considered a shadow directly.

Defined as: a person in accordance with whose directions or instructions the directors of the company are accustomed to act.

Typically an individual who still wants to exert some control over a company, but in a way that evades any potential responsibility or liability connected with the office of a director, because, e.g., they are a disqualified director.

Question 11

How does the Companies Act 2006 treat shadow directors?

Answer 11

The same as de factor or de jure directors.

Question 12

Who is excluded from the definition of a shadow director by the Companies Act 2006?

Answer 12

Advisors acting for the company in a professional capacity.

Question 13

What are executive directors?

Answer 13

Responsible for the day-to-day running of the company + are employees of the company/

Question 14

What are non-executive directors?

Answer 14

Usually consultants and take more of a supervisory role overseeing the activity of the executive directors.

Question 15

What is an alternate director?

Answer 15

Someone appointed by a director to attend and vote at board meetings when the director is unable to attend.

Question 16

What is a nominee director?

Answer 16

Appointed to the board to represent the interests of a particular stakeholder, usually a shareholder.

Still de jure directors + have all the rights and duties expected of other directors.

In particular, a nominee director must still act in the best interests of the company, even though they have been appointed to represent the interests of a particular stakeholder.

Question 17

What powers do the model articles give the directors?

Answer 17

The power to exercise all of the powers of the company except where the articles specifically provide otherwise.

Question 18

How do the shareholders retain an element of control over the directors?

Answer 18

The model articles state that the shareholders may, by special resolution (75% or more) direct the directors to take, or refrain from taking, specified action.

Question 19

How much directors exercise their powers ?

Answer 19

Required by the model articles to exercise their powers collectively as a board.

However, it is permitted for the board to delegate their powers to a person or committee as they think fit.

Question 20

What decisions typically require shareholder involvement?

Answer 20

Commonly decisions which would alter the constitution of the company or where the directors have a financial interest in the transaction.

Question 21

What is a company decision called?

Answer 21

A resolution

Question 22

What kinds of decisions require shareholder approval?

Answer 22

Many all the shareholders to approve a transaction in which a director has a financial interest.

E.g., the board needs shareholder approval to offer a director an employment contract for longer than 2 years.

Question 23

What kinds of decisions are reserved for shareholders?

Answer 23

Certain decisions are reserved to the shareholders by legislation (CA 2006) or in the articles.

E.g., changing the articles requires a special resolution

Question 24

How can directors bind the company?

Answer 24

A company’s directors are agents of the company, and so they can bind the company in contract or for liability in tort if they act with actual or apparent authority.

Question 25

What is apparent authority?

Answer 25

Also known as ostensible authority.

Authority a third party reasonably believes the director has based on communication from the company - including merely holding the director out to the third party as a director.

The director will have authority to do whatever a director ordinarily would have authority to do unless the third party has reason to know the person lacked such authority.

Question 26

What happens if a director acts and it is then discovered that there was a defect in their appointment?

Answer 26

The Companies Act 2006 provides that acts of a person acting as a director are valid notwithstanding that it is afterwards discovered that there was a defect in their appointment, that they were disqualified from holding office, that they had ceased to hold office, or that they were not entitled to vote on the matter in question.

Question 27

How is actual authority granted to a director?

Answer 27

Can be expressly granted to a director in the articles or by a resolution –> a director has actual authority to do whatever the articles or a resolution say the director can do.

Question 28

When could apparent authority arise?

Answer 28

Could arise through past dealings.

Question 29

How may companies enter contracts?

Answer 29

Under their seal or by a person with authority to act on behalf of the company.

Question 30

How may companies execute documents?

Answer 30

Either by affixing their seal to the documents or by the signature of either:
- 2 directors, or
- a director and a secretary, or
- a single director if signed in the presence of a witness who attests the signature

Question 31

Where are directors’ duties derived from?

Answer 31

A number of sources, mainly the common law, the articles, and statute.

Will also have obligations that arise by virtue of their contracts of employment with the company

Question 32

What can shareholders do if a director breaches their duty?

Answer 32

It is possible for the shareholders to ratify the conduct of the director by passing an ordinary resolution.

If the director is also a member, their vote would be disregarded.

Question 33

What is the basic fiduciary duty?

Answer 33

A director has a common law fiduciary duty to act in good faith + in the best interest of the company as a whole.

Question 34

What is the effect of provisions in the articles or a contract that purports to exempt a director for liability for a director’s breach of duty, negligence or breach of trust in relation to the company?

Answer 34

Such a provision is void.

Question 35

What may a company do to protect a director from liability for breach of duty, negligence, or breach of trust in relation to the company?

Answer 35

The company may indemnify directors against liability they incur on claims by third parties against the directors based on their position with the company, except with respect to criminal or regulatory fines

Question 36

How long will a director be subject to statutory and fiduciary duties?

Answer 36

May still be subject to statutory and fiduciary duties owed for the period when they were a director, even after they have ceased being a director.

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

Question 37

What is a director’s duty to act within powers?

Answer 37

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

Question 38

What is a director’s duty to promote the success of the company?

Answer 38

A director must act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

Question 39

What are directors able to consider when deciding what is best for the company as a whole?

Answer 39

Directors are not limited to considering only what will maximise profit.

In the Companies Act 2006, Parliament adopted the concept of ‘enlightened shareholder value’ and requires directors have have regard to all of the following:

i. likely consequences of any decision in the long term,

ii. interests of the company’s employees,

iii. need to foster the company’s business relationships with other stakeholders (e.g., supplies and customers),

iv. impact of the company’s operations on the community + the environment

v. the desirability of the company maintaining a reputation for high standards of business conduct, and

vi. the need to act fairly as between members of the company

Question 40

What is the director’s duty if the company is insolvent or is on the brink of becoming insolvent?

Answer 40

The Companies Act 2006 requires the directors to consider or act in the interests of the creditors of the company.

The duty to shareholders is displaced.

Question 41

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

Answer 41

A director must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with:

• the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company (objective test), and
• the general knowledge, skill, and experience the director in question actually has (subjective test).

Each director is judged by whichever standard applicable to the director is higher.

Thus, a director with no more knowledge, skill, and experience than reasonably expected is judged under the objective test.

A director with more experience is judged under the subjective standard.

Question 42

What is the duty to exercise independent judgment?

Answer 42

A director must exercise independent judgment, without subordinating their powers to the will of others.

Question 43

When is the duty to exercise independent judgment not breached?

Answer 43

Not breached by a director acting in accordance with an agreement which has been entered into by the company, or in a way authorised by the company’s constitution/articles.

It also doesn’t prevent a director from seeking independent advice from experts, so long as the director makes the final decision + doesn’t delegate their decision making to the expert.

Question 44

What is a director’s duty to avoid conflicts of interest?

Answer 44

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.

Question 45

When is the duty to avoid conflicts of interest not breached?

Answer 45

If the conflict of interest relates to:
1. a transaction with the company itself + 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 46

What is the position re secret profit?

Answer 46

A director should not make an unauthorised profit from the company, sometimes referred to as a secret profit.

However, both the conflict of interest + a secret profit can be authorised by the directors.

Question 47

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

Answer 47

A director is not allowed to accept a benefit from a third party conferred by reason of being a director, or doing (or not doing) anything as a director.

Question 48

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

Answer 48

Exception to the rule where the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Question 49

What is a director’s duty to declare an interest in proposed or existing transactions or arrangements?

Answer 49

If a director is in any way, directly or indirectly, 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.

Question 50

What form of notice is required when a director declares an interest in a proposed/existing transaction or arrangement? What must it include?

Answer 50

No particular form of disclosure is required.

Statute permits disclosure by:
- written notice,
- general notice, or
- oral notice at a meeting of the directors.

Must include the nature + extent of the interest.

Note - disclosure to the members is not sufficient.

Question 51

What is the effect on quorum if a director has an interest in an actual or proposed transaction?

Answer 51

Under the model articles, a director who is interested in an actual or proposed transaction with the company usually cannot form the quorum on that decision

Question 52

What is a director not required to declare an interest in an existing or proposed transaction/arrangement?

Answer 52

If:
i. it could not reasonably be regarded as likely to give rise to a conflict of interest,

ii. the other directors are already aware of it, or

iii. it concerns terms of the director’s service contract that have been or are to be considered by the board of directors.

Question 53

What is the rule on loans to directors?

Answer 53

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 54

How is the conduct of board meetings regulation?

Answer 54

Almost entirely unregulated by the Companies Act 2006.

However, the articles will usually have provisions that govern.

Question 55

How can a board meeting be called?

Answer 55

Pursuant to the model articles, any director may call a directors’ meeting by giving reasonable notice of the meeting to the other directors or by authorising the company secretary (if the company has one) to give notice.

What constitutes ‘reasonable notice’ will depend on the facts, but could be as little as a few minutes for a non-contentious issue, if all the directors work in the same office.

Question 56

What is required of a notice of a board meeting?

Answer 56

Notice doesn’t need to be in writing, but must indicate its:
- proposed date and time,
- location, and
- if it is anticipated that the directors participating will not be in the same place, how it is proposed that they should communicate with each other during the meeting.

Question 57

Who must receive notice of a board meeting?

Answer 57

Notice of a directors’ meeting must be given to each director unless they have waived their entitlement to notice of that meeting

Question 58

How are decisions made at a board meeting?

Answer 58

Made by a majority vote.

Model articles allow for the chairman of the board to have a casting vote in the event of deadlock

Question 59

When are directors prohibited from voting and counting towards the quorum?

Answer 59

Under the model articles, directors are prohibited from voting (and counting towards the quorum) on resolutions in which they have an interest, subject to certain exceptions.

Question 60

What is the quorum for a directors’ meeting?

Answer 60

The quorum (no. of directors who must participate to make the meeting valid) is usually no less than 2, pursuant to the model articles.

Question 61

When may a director be prevented from counting in the quorum?

Answer 61

If a director has a personal interest in a matter.

Question 62

When can directors use written resolutions?

Answer 62

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 (unanimous approval) rather than a majority.

Question 63

What happens if a director’s service contract is being agreed by the board?

Answer 63

That director whose service contract is being agreed may not count towards quorum or the vote on that issue.

Question 64

What rights to compensation do directors have?

Answer 64

The model articles for private companies limited by shares provide that the board may determine what constitutes fair compensation for the directors.

Question 65

What rights do directors have re expenses?

Answer 65

The model articles provide that the company may pay reasonable expenses the directors incur in connection with attending meetings.

Question 66

How can a director be removed?

Answer 66

The power to remove a director is given to the shareholders under the Companies Act 2006.

Carried out by way of an ordinary resolution.

It is not possible to remove a director by written resolution.

Question 67

How may the shareholders’ powers to remove a director be limited?

Answer 67

By a clause known as a Bushell v Faith clause.

This gives weighted voting rights to a director who is also a shareholder in the event of a resolution to remove a director.

Question 68

What may removal of a director trigger?

Answer 68

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

Question 69

What notice for removal of a director is needed?

Answer 69

A shareholder wanting to propose a resolution to remove a director must give the company a formal notice of the intention to propose the resolution at least 28 days before a general shareholders’ meeting.

The company must give notice to the director.

Question 70

What rights does the director have when faced with removal?

Answer 70

Director has the right to make a written representation (which the company must send to shareholders) and,

Right to speak at the meeting (even if that director is not a shareholder).

Question 71

What is retirement by rotation in public limited companies?

Answer 71

In the case of a PLC, the model articles provide that at the first annual general shareholders’ meeting, all the directors must retire from office.

At every subsequent annual general shareholders’ meeting, any directors who have been appointed by the directors since the last AGM, or who were not appointed or reappointed at one of the preceding 2 AGMs, must retire from office + may offer themselves for reappointment by the members

Question 72

What is the purpose of the system of retirement by rotation?

Answer 72

Gives new shareholders that have subscribed for shares since the last annual general shareholders’ meeting a chance to have a say in the composition of the board

Question 73

When can a director be disqualified from office?

Answer 73

Can be disqualified from office under the Company Directors Disqualification Act 1986 (CDDA) for general misconduct in connection with companies or because of unfitness.

Question 74

What happens if an individual is disqualified under the CDDA?

Answer 74

They may not:
- be a director of a company,
- act as receiver of a company’s property, or
- in any way take part in the promotion, formation, or management of a company

Question 75

How can a director be disqualified for general misconduct in connection with companies?

Answer 75

1. Conviction of an indictable offence in connection with the promotion, formation, management, liquidation, or striking off of a company, with the receivership of a company’s property, or with being an administrative receiver of a company,
2. Persistent breaches of companies’ legislation requiring any return, account, or other document to be filed with the Registrar of Companies,
3. Fraud, including fraudulent trading, in connection with the winding up of a company, or
4. Summary conviction of an offence in contravention of, or failure to comply with, any provision of the companies’ legislation requiring a return, account, or other document to be sent to the Registrar of Companies

Question 76

How long can a director be disqualified for unfitness?

Answer 76

Between 2 and 15 years

Question 77

When can a director be disqualified for unfitness?

Answer 77

Can be disqualified under for being an unfit director of an insolvent company, if the director’s conduct as a director of that company makes them unfit to be concerned in the management of a company.

The Secretary of State may apply to court for an order if an investigation shows that it is expedient in the public interest that a disqualification order should be made.

Can be disqualified for wrongful trading under the Insolvency Act 1986, or because they are an undischarged bankrupt.

Can also give a voluntary disqualification undertaking - wouldn’t need to go to court.

Question 78

Who needs to have a company secretary under the Companies Act 2006?

Answer 78

Public companies.
Not private companies.

Question 79

Who usually appoints and removes the company secretary?

Answer 79

The directors

Question 80

What duty to directors have when appointing a company secretary?

Answer 80

Public company directors have a duty to take reasonable steps to ensure the secretary has the requisite knowledge and experience to discharge the functions of secretary of the company + is appropriately qualified.

Question 81

What qualifications must a public company secretary have?

Answer 81

1. Held office of secretary of a public company for at least 3 of the 5 years immediately preceding this appointment as secretary,
2. Is a member of a specified list of accountancy/secretarial bodies
3. Is a barrister, advocate, or solicitor called or admitted in any part of the UK, or
4. Is a person who, by virtue of holding or having held any other position or being a member of any other body, appears to the directors to be capable of discharging the functions of secretary of the company

Question 82

What are company secretaries usually responsible for?

Answer 82

There are no prescribed duties of a company secretary by legislation, but they are usually responsible for:
i. maintaining the books + records of the company,

ii. taking minutes at shareholder + board meetings, and

iii. making sure the company is in compliance with its statutory obligations, e.g., filing requirements under the Companies Act 2006.

Question 83

What powers does a company secretary have?

Answer 83

Usually expressly delegated by the board of directors, but much like a partner in a partnership, a company secretary’s authority can also be implied or apparent.

This means that the company can be bound by the acts of a company secretary even if they were not authorised by the board, if the contracts the company secretary entered were of an administrative nature.
- of the type that a third party could reasonably assume would be within the powers of the company secretary.

Question 84

Who must prepare accounts?

Answer 84

Under the Companies Act, all companies must prepare accounts.

Question 85

What is required of large companies when it comes to accounts?

Answer 85

Companies Act 2006 requires large companies to hire a specialist accountant known as an auditor.

If the accounts require auditing, the auditor will be appointed by the directors/

Question 86

What companies do not require auditing?

Answer 86

Small companies - those with an annual turnover of less than around £10 million + no more than 50 employees.