Chapter 8 - Companies: ownership and management

Question 1

Types of director - De facto director

Answer 1

Anyone who acts as a director, although not validly appointed as one

Question 2

Types of director - Shadow director

Answer 2

Someone ‘in accordance with whose directions or instructions the directors are accustomed to act’

Question 3

Types of director - Alternate director

Answer 3

A director may appoint an alternate director to attend and vote at board meetings when he is unable to

Question 4

Types of director - Executive director

Answer 4

In charge with performing a specific role e.g finance director

Question 5

Types of director - Non-executive director

Answer 5

Who does not have a particular function but generally just attend board meetings

Question 6

Types of director - Managing director

Answer 6

Usually provide for the directors to appoint one or more of their number to be managing director, carrying out day-to-day functions

Question 7

Removal of a director

Answer 7

Might leave in any of the following ways:
- Death
- Removal
- Disqualification
- Resignation
- Required to do by article
- Prohibition by law
- Result of bankruptcy

Question 8

Director’s powers - Statutory (general)

Answer 8

The directors are statutorily bound to exercise powers only ‘for the purpose for which they are conferred’

Question 9

Director’s powers - Statutory (specific)

Answer 9

For example alteration of the articles and reduction of capital need a special resolution, which the directors must secure from the shareholders in general meeting before they can act

Question 10

Director’s powers - Articles

Answer 10

For example the articles may set a maximum amount that the directors are entitled to borrow, any greater amount needing approval

Question 10

Director’s powers - Members

Answer 10

The members can exercise control over the directors’ powers:

• By passing special resolution to alter the articles
• Removing directors

Question 11

Directors’ authority - Express actual

Answer 11

The actions of a director with express authority will bind the company

Question 12

Directors’ authority - Implied

Answer 12

Managing directors and to some extent other executive directors, are much more likely to bind the company by their actions.

A company secretary has limited authority to enter into contracts.

Question 13

Directors’ authority - Ostensible

Answer 13

If the board permits a director to behave as if he were a managing director or give the impression that he is one, that director will have apparent or ostensible authority to enter a contract

Question 14

Directors’ duties - To act within powers

Answer 14

A director must:
- Act in accordance with the company’s constitution

• Exercise powers only for the purpose for which they were conferred

If director act outside their powers the transaction will be invalid

Question 15

Directors’ duties - To promote the success of the company

Answer 15

A director must act in the way he considers, in good faith, would be most likely to promote success of company.

He should have regard to:

• Long term consequences of any decision
• Interest of employees
• Impact on operations

Question 16

Directors’ duties - To exercise independent judgement

Answer 16

It does not mean that he is not exercising independent judgment where he acts in accordance with:

• The company’s constitution
• An agreement duty entered into by the company that restricts the future exercise of discretion by its directors

Question 16

Directors’ duties - To exercise reasonable skill and care

Answer 16

This means the level of skill, care, and diligence that would be exercised by a reasonably diligent person with:

• The knowledge, skill and experience expected of a person performing his functions as director

Question 17

Directors’ duties - To avoid a conflict of interest

Answer 17

A director must avoid a situation in which he has or can have a direct or indirect conflict of interest

Question 18

Directors’ duties - Not to accept benefits from third parties

Answer 18

A director must not accept a benefit from a third party by reason

Question 19

Directors’ duties - To declare an interest in proposed transaction

Answer 19

Provided the director, aware of the situation he must declare the nature and extent of any such interest to the other directors.

Question 20

Breach of director duties

Answer 20

Duties are owed to the company and not to the shareholders. Consequences includes:

• To make good any loss suffered (secret profits)
• Any contracts between director may be rendered voidable
• Injunction if breach continuing

Question 21

Wrongful trading

Answer 21

• Where a company goes into insolvent liquidation and
• Before winding up trading knowing there’s no reasonable prospect the company would have avoided liquidation

Question 22

Wrongful trading - Consequences

Answer 22

The court can order him to ‘make such contribution to the assets of the company as the court thinks proper’

Question 23

Fraudulent trading

Answer 23

Where any business of a company is carried on with intent to defraud creditors.

Question 24

Fraudulent trading - Consequences

Answer 24

Can give rise to civil or criminal offence.

Civil - ‘make such contribution to the assets of the company as the court thinks proper’

Criminal - Fine or imprisonment up to 10 years

Question 25

Member rights

Answer 25

• To be sent copy of accounts and reports
• Require directors to call general meeting
• Appoint a proxy

Question 26

What are the required amount of shares to - Cancellation of variation of class rights

Answer 26

> / 15% class of shares

Question 27

What are the required amount of shares to - Right to call a company meeting

Answer 27

> / 5% of shares

Question 28

What are the required amount of shares to - Notice of members’ resolutions

Answer 28

> / 5% of shares

Question 29

Notice when a company director calls a general meeting

Answer 29

14 days clear notice

Question 30

Notice when members with >/ 5% of shares calls a general meeting

Answer 30

Directors have 21 days to call and must be held within 28 days

Question 31

Notice for the AGM

Answer 31

21 days and must not be more than 6 months after reference date