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Law > Chapter 8 - Companies: Ownership and management > Flashcards

Chapter 8 - Companies: Ownership and management Flashcards

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1
Q

Define what a director is

A

Includes every person occupying the position or fulfilling the role of director. S.250 CA06

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2
Q

How many directors are required in a company and in a PLC

A

Company: 1
PLC: two (s.154 CA06)

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3
Q

What’s a defacto director?

A

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

A person who becomes liable as a director due to his or her conduct

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4
Q

What’s a De jure director?

A

A person who has been appointed following the correct legal procedure

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5
Q

What’s a shadow director?

A

A person in accordance with whose directions or instructions the directors of a company are accustomed to act s.251 CA06

*Not a shadow director if directors only act on advice

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6
Q

What’s an alternate director?

A

*A director may appoint an alternate director to attend and vote at board meetings

*The alternate director may be another director or an outsider

*Some articles provide for such an appointment to be subject to the approval of the board

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7
Q

What’s an Executive Director?

A

*Likely to be a full-time employee involved in management

*Usually has a specific role e.g., marketing director

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8
Q

What’s a NED

A

Non executive director

*Usually part-time
*Brings outside expertise to the board
*Not an employee
*Exerts control over executive directors

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9
Q

What’s a managing director?

A

Board usually delegates to the MD the day-to-day management of the company’s business

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10
Q

What’s a chairman?

A

Responsible for ensuring procedures in meetings is followed

Usually a NED

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11
Q

What is the appointment procedure?

A

Appointed by existing directors or by ordinary resolutions

Directors of public companies should generally be voted on individually s.160 CA06

A director’s actions are valid notwithstanding that his or her appointment was defective s.161

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12
Q

In terms of publicity when does the company need to notify the Registrar?

A

14 days

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13
Q

What ways can a director leave

A
  1. Death
  2. Removal
  3. Disqualification
  4. Resignation
  5. Not offering himself or herself for re-election where the articles provide for retirement and re-election of directors
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14
Q

According to model articles the director should leave office under the following circumstances:

A
  1. prohibited from being a director by law
  2. bankruptcy order is made against him or her
  3. he or she is the subject of a composition with creditors with regards to his or her debts
  4. A registered medical practitioner gives a written opinion that they are incapable of acting as a director
  5. Court passes an order that due to their mental health they should be prevented from exercising the powers of a director
  6. The director gives notice as to his or her resignation
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15
Q

What’s the procedure to remove a director

A
  1. Special notice (28 days) required of the resolution by persons wishing to remove a director - S.168 CA

The company must forward a copy of the resolution to the director concerned

  1. Notice of meeting goes to the director and all members vote
  2. Director in question can get company to circulate written representation to members s169
  3. At meeting, director can read representation if no time for circulation.
    Director must be allowed to speak and attend the meeting
    Ordinary resolution is needed to remove director S.168
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16
Q

Can an executive director sue for breach?

A

yes

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17
Q

In what two conditions would the power of members to remove directors might be limited

A
  1. A director who is also member be given weighted voting rights.
  2. Shareholder agreement might state that shareholdings holding each class of shares must be present at meeting for decisions to be valid. e.g. if one shareholder doesn’t attend then they could prevent the director from being removed
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18
Q

What are unrestricted objects

A

Unrestricted objects are a company’s unrestricted capacity to do what it wants, unless its articles of association specifically restrict it.

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19
Q

What restrictions are put on the directors powers

A

General statutory restriction
Specific statutory restriction
Restrictions in the articles
Restrictions of powers made by members

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20
Q

What is a general statutory restriction?

A

CA 2006 states directors must only use their powers for the purpose for which they are conferred.

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21
Q

What are specific statutory restrictions?

A

CA states that there are certain decisions for which directors must gain shareholder approval by way of an ordinary or special resolution

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22
Q

What are restrictions of powers made by the members?

A

If members are unhappy by the way company is run they can

*Get the director removed via ordinary resolution
*Members can alter articles by passing special resolutions

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23
Q

Difference between Ordinary Resolution and Special Resolution

A

Ordinary - Requires a simple majority (more than 50%), used for routine matters, standard notice period.

Special resolution - Requires a supermajority (often 75%), used for significant changes, longer notice period

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24
Q

What are the three ways in which authority can be given to directors

A

Express, implied and apparent

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25
Q

What is express authority when given to directors

A

Where authority is expressly given, all decisions are binding

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26
Q

What is implied authority when given to directors?

A

*Authority flows from a person’s position
*Person appointed as the managing director has the implied authority to bind the company in the same way as the board
*Managing director is assumed to have all powers usually exercised by a managing director

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27
Q

What is apparent/ostensible authority

A

*Arises when director is held out by other board members as having authority to bind the company

*At common law, if a third party acts in good faith on such representation, company is estopped from denying it’s truth: Freeman & Lockyer V Buckhurst Park Properties 1964

*For these purposes the third party is deemed to be acting in good faith unless contrary is proved

SIMPLY PUT

Director acts like they’ve got power to those in public

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28
Q

What does Section 40 CA 2006 say about directors exceeding their authority?

A

A transaction is valid if the directors act together to bind the company, as long as the other party acts in good faith, even if the company’s constitution limits their powers.

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29
Q

What does Section 41 CA 2006 say about transactions involving directors or their associates?

A

Company can void such transactions. Directors involved may be liable for any losses

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30
Q

Can a transaction be valid if the other party knows the director exceeded their authority?

A

Yes, unless the other party acted in bad faith. Good faith is the key consideration

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31
Q

When can members prevent directors from entering an unauthorised transaction?

A

Before the transaction is completed

Section 40(4) CA 2006

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32
Q

When can a company not void a transaction under section 41 CA 2006

A

If reimbursement is no longer possible or if the company has affirmed the contract

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33
Q

What is required under Section 171 CA 2006?

A

Directors must act within the company’s constitution and use their powers for proper purpose

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34
Q

What factors must directors consider under Section 172 CA 2006 when promoting the company’s success

A

Long term consequences, employee interest, supplier/customer relationship, community environmental impact, business reputation and fairness between members

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35
Q

What does standard of care under Section 174 CA 2006

A

Directors must act with reasonable care, skill and diligence based on general and personal knowledge or experience

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36
Q

What does Section 175 CA 2006 say about conflict of interest?

A

Directors must avoid conflicts unless authorised by the board or members

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37
Q

What must directors do under section 177 CA 2006?

A

Declare any interest in proposed transactions or arrangements with the company

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38
Q

What does section 176 CA 2006 prohibit?

A

Accepting third-party benefits that may cause a conflict of interest

39
Q

Per the Company House Act 2006 - Who do directors owe their duties to

A

The company as a whole, including current and future shareholders (not individual members)

40
Q

What does section 232 CA 2006 state about exemptions for directors?

A

Directors cannot be exempted from liability for breaches of duty or negligence

41
Q

What are possible consequences of breaching directors duties?

A

Compensation for losses, voidable contracts, recovery of property or injunctions to prevent breaches

Through passing ordinary resolution if it’s related to not disclosing interest per S239 CA

42
Q

Can property transferred to a third party be recovered?

A

Yes unless third party bought it in good faith and for value

43
Q

What can excuse directors from liability for breaching duties

A

acting honestly and reasonably and if court finds it fair under the circumstances

44
Q

What is fraudulent trading and what must be proven to establish it?

A

Involves carrying on business with the intend to defraud creditors or for fraudulent purposes, requiring proof of dishonesty

45
Q

Who is held liable for fraudulent trading?

A

Anyone knowingly involved in the fraudulent conduct, including directors and participants

46
Q

What are the key legal consequences of fraudulent trading?

A

Must contribute to the company’s assets on a winding up under S213 IA86 and potential fines and imprisonment s.993 CA06

47
Q

What is wrongful trading and when does it occur?

A

Occurs when directors knew or should have known there was no reasonable prospect of avoiding insolvent liquidation but failed to take steps to minimise losses
S214 IA86

48
Q

What is the standard applied to determine wrongful trading liability?

A

Standard of reasonably diligent director, considering both general expectations and the director’s specific skills and knowledge

49
Q

What are the consequences of wrongful trading?

A

Contribute to company’s asset. Up to 15 years disqualification under CDDA86

50
Q

What case law demonstrates fraudulent trading?

A

R v Grantham: Fraudulent trading found when goods were ordered on credit with no intent to pay

51
Q

What key case law demonstrates wrongful trading

A

Re Produce Marketing Consortium - A successful defense where directors took reasonable steps to minimise losses.

51
Q

What is the purpose of the Company Directors Disqualification Act 1986?

A

Prevent disqualified individuals from managing a company or acting as a liquidator, receiver or promoter

52
Q

What are the key grounds for disqualification under the Directors Disqualification Act 1986?

A

Persistent breaches of the companies Act e.g., failure to file returns, serious offences related to company management, fraudulent/wrongful trading, Secretary of State findings, liquidator’s report of unfitness, acting against public interest and breach of competition law

53
Q

What is the maximum disqualification period for most offences under the Company Directors Disqualification Act 1986

A

15 Years

54
Q

What are the consequences of breaching a disqualification order?

A

It is a criminal offence, punishable by fines and imprisonment and the director became personally liable for company debts incurred during their involvement

55
Q

What is the minimum disqualification period for a liquidator’s report that finds a director unfit

A

2 Years

56
Q

What document sets out the internal rules and members rights of a company?

A

The articles of association

57
Q

What are the key rights of company members?

A

Receiving annual accounts, calling for a general meeting and appointing a proxy

58
Q

When is approval required for directors’ service contracts under s.188

A

If the contract lasts two or more years

If not approved, contract is deemed to include a term allowing company to terminate

59
Q

What constitutes a “substantial property transaction” under s.190

A

An asset worth over £100,000 or exceeding 10% of the company’s asset value and is more than £5,000

Failure to obtain members approval results in the following consequences:
*transaction is voidable by the company unless members give approval within a reasonable period
*director is liable to account to the company for any gain or indemnify it against any loss

60
Q

What happens if a loan to a director s.197 is not approved?

A

The loan is voidable, and the director is liable for any loss

61
Q

Which types of loan don’t require approval

A

Minor transactions, and those related to company business

62
Q

What is required for payments to directors for loss of office under s.217

A

Approval through a member memorandum otherwise directors must indemnify the company

63
Q

What voting rights do shareholders have at the following thresholds

<5%, <15% and <25%

A

> 5%: Can force resolution into AGM or call a general Meeting
15%: Can apply to court to cancel variations in class rights
25%: Can block special resolutions altering name, articles, or share capital

64
Q

What principle established in Foss v Harbottle (1843)

A

As a general rule only the company can sue for wrongs done to it since it is a separate legal entity.

65
Q

Under what circumstances can shareholders bring a derivative action s.260 CA 2006

A

Breach of duty by directors, evaluated based on good faith, company’s decision to avoid the claim, and member’s interest

66
Q

What are examples of unfairly prejudicial conduct under s.994 CA 2006?

A

Dismissing a shareholder-director in a quasi-partnership, failing to pay dividends, or improperly allotting shares

67
Q

When can a minority shareholder request just and equitable winding up under s.122 Insolvency Act?

A

If the company was formed for fraudulent purposes, there’s deadlock in management, or shareholders lose confidence in management.

68
Q

Who can apply for relief for unfair prejudice?

A

Only a member of the company focusing on harm caused to them as a member

69
Q

What orders can the court make for relief for unfair prejudice

A

The court may:

*Require the company/members to buy shares of the petitioner at a fair price
*Authorise court action in the company’s name
*Regulate the company’s future conduct
*Order the company to perform or stop certain action

70
Q

Under what circumstances can a minority shareholder request the winding up of a company (s.122 Insolvency Act 1986)

A

*If the conduct was formed for illegal or fraudulent purposes

*When management deadlock occurs

*When shareholders lose confidence in the management

71
Q

How often does a company hold its AGM under s.336 Companies Act 2006?

A

Once a year, within 6 months after the accounting reference date. Failure to hold the company and every officer in default can be fined

72
Q

Are private companies required to hold AGM?

A

No

73
Q

What is the minimum notice period for an AGM?

A

21 days, unless all members agree to a shorter period

74
Q

What business is typically conducted at an AGM?

A

Reviewing accounts, appointing auditors, electing directors, and declaring dividends

75
Q

Under s.338 Companies Act 2006, how can members force a resolution onto the AGM agenda?

A

By holding 5% of voting rights or by 100 members each holding an average of £100 in paid-up share capital

76
Q

When must a public limited company hold a general meeting due to financial concerns?

A

Held whenever required

Must be held If there is a serious loss of capital e.g. (net assets fall below half of called-up share capital)

77
Q

What is the required notice period for a General meeting?

A

14 days

78
Q

What’s the main purpose of a Class Meeting?

A

To discuss and approve variations to the rights of a specific class of shareholders or debenture holders

79
Q

What is the minimum amount of people required to hold meeting (quorum)

A

two people holding or representing at least one third of the issued shares of the class

80
Q

Who can call a meeting in terms of directors

A

Articles usually delegate power to directors

81
Q

Who can call a meeting in terms of Members

A

If they hold at least 5% of the paid up voting capital

or

At least 5% of the voting rights

82
Q

What must directors do if members request a General Meeting?

A

Call the meeting within 21 days and hold it within 28 days of sending the notice

83
Q

What can happen if directors fail to call a meeting after a members request?

A

Members holding over 50% of voting rights can call the meeting themselves within three months and recover expenses from the company

84
Q

When can a court call a meeting

A

When requested by a director or member if it’s impractical otherwise such as resolving a deadlock

85
Q

Who can call a meeting in terms of Resigning auditors

A

Auditors may require the directors to convene so they can explain the reasons for their resignation.

86
Q

Who must receive notice for a meeting under s.310

A

Every member and every director

87
Q

What happens if notice is accidentally not sent under s.313?

A

Meeting remains valid

88
Q

What must a notice include?

A

Date, time, place of the meeting, nature of the business and any special resolution

89
Q

What are the notice periods for AGMS and GMS?

A

AGM: 21 days
GM: 14 Days

90
Q

What is a special notice, and when is it required?

A

A 28 day notice required for the removal of a director or auditor allowing written representation to be circulated

91
Q
A
92
Q
A

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