Chapter 8 - Companies: ownership and management

Question 1

What are the different types of directors in a company? 7

Answer 1

Director (on incorporation or subsequently): Appointed by articles, existing directors, or ordinary resolution.

De facto director: Acts as a director without formal appointment.

Shadow director: Influences the board without being formally part of it.

Alternate director: Appointed to act temporarily in another director’s place.

Executive director: Performs specific executive functions (e.g., finance director).

Non-executive director: Does not perform executive functions, primarily attends board meetings.

Managing director (MD): Handles day-to-day management as per board’s delegation.

Question 2

What are the key points regarding director qualifications and roles? 5

Answer 2

• Must be at least 16 years old.
• Must not be disqualified under the Company Directors Disqualification Act 1986 or by articles of association.
• Every company needs at least one director (two for public companies).
• Actions remain valid even if the appointment was defective.
• Changes in directors must be registered with the registrar within 14 days.

Question 3

In what ways can a director leave office? 7

Answer 3

Death or company winding up.
Removal via resolution (explained in detail below).
Disqualification (legal ineligibility).
Resignation.
Requirements in the articles of association.
Prohibition by law.
Bankruptcy or medical inability to perform duties.

Question 4

What is the process for removing a director? 5

Answer 4

A director can be removed by an ordinary resolution under Section 168.
Special notice (28 days) of the resolution must be given.
The director has the right to attend and address the meeting.
Written representations by the director must be circulated or read at the meeting.
Removal may breach a service contract, allowing the director to sue for damages.

Question 5

How can a director prevent removal? 2

Answer 5

1. Weighted voting rights in the constitution (e.g., Bushell v Faith 1970) can block removal. - so we vote based on no of shares etc
2. Shareholder agreements requiring specific quorums for removal can also safeguard directors.

Question 6

What happens if a removed director holds a service contract?

Answer 6

The removal could constitute a breach of the service contract, entitling the director to sue for damages.

Question 7

How are shadow directors treated under the law?

Answer 7

Shadow directors are treated as directors if they influence the company significantly, and they bear the same responsibilities and liabilities in such cases.

Question 8

TERACTIVE QUESTION 17: RESOLUTION FOR THE REMOVAL OF A DIRECTOR

A company has three members who are also directors. Each holds 100 shares. Normally the shares carry one vote each, but the articles state that on a resolution for a director’s removal, the director to be removed should have 3 votes per share. On a resolution for the removal of Jeremy, a director, Jeremy casts 300 votes against the resolution and the other members cast 200 votes for the resolution. Has Jeremy validly defeated the resolution?

A No, the articles are invalid insofar as they purport to confer extra votes.
B Yes, the proceedings and articles are valid.
C Yes. Whilst the articles are invalid and the voting is therefore 200 to 100 in favour, a special resolution is required and the necessary 75% majority has not been obtained.
D No. A director is not entitled to vote on a resolution for his own removal.

Answer 8

B Yes, the proceedings and articles are valid.

Question 9

What defines the powers of directors in a company?

Answer 9

The powers of directors are defined by the company’s articles and must be exercised properly and within the company’s constitution. Directors are not agents of the members and are not subject to their instruction.

Question 10

How are directors’ powers typically exercised?

Answer 10

Powers are vested in directors collectively and are usually exercised in board meetings. Meetings can be held without physical presence if none of the directors reasonably object.

Question 11

What are the restrictions on directors’ powers? 4

Answer 11

Statutory (General): Powers must be exercised for their intended purpose.

Statutory (Specific): For actions like altering articles or reducing capital, directors need a special resolution from shareholders.

Articles: Articles may limit the maximum powers directors can exercise, requiring member approval for exceeding those limits.

Members: Members can control or limit directors’ powers through special resolutions or by removing directors from office. MEMBERS HAVE ULTIMATE CONTROL.

Question 12

What are the 3 types of authority a director may have when entering into contracts?

Answer 12

Actual authority
Implied authority
Apparent/ostensible authority.

Question 13

What is actual authority?

Answer 13

The actions of a director with express authority will bind the company
Authority explicitly given to a director by the company, either expressly (e.g., managing director signing general business contracts)

Question 14

What is implied authority?

Answer 14

Managing directors, and to some extent other executive directors (such as sales directors or finance directors), are much more likely to bind the company by their actions, since greater powers are usually delegated to them. Thus a managing director has implied usual authority to make general business contracts on behalf of the company (in addition to any actual authority given to him by the board).

impliedly (e.g., actions customary for their role).

Question 15

What is ostensible authority?

Answer 15

Authority that a third party reasonably believes a director has due to the company’s actions or behavior, such as the board permitting a director to act as a managing director.

Question 16

Can a company secretary bind the company with their authority?

Answer 16

Yes, but their authority is limited to administrative operations like managing office staff and cannot include significant actions like borrowing money or purchasing land.

Question 17

What does Legislation Section 40 of the Companies Act 2006 state about third-party contracts? 3

Answer 17

1. A third party is deemed to act in good faith unless proven otherwise.
2. Limitations on the director’s authority can be disregarded when dealing with third parties in good faith.
   3, Section 40 does not protect transactions involving directors or connected persons, making such transactions voidable.

Question 18

When can limitations on a director’s authority be disregarded under Section 40 legislation?

Answer 18

When a third party acts in good faith and is not connected to the company, even if they are aware of the director’s limitations.

Question 19

What happens if a person connected to a director enters into a transaction with the company?

Answer 19

The transaction may be voidable, and the connected party may be required to account for any gains and indemnify the company for any losses.

Question 20

What is the general principle of directors’ duties under company law?

Answer 20

Directors owe their duties to the company as a whole, not to individual shareholders.

Question 21

What are the key duties directors must fulfill according to the acronym ASPIRIN?

Answer 21

Accountability
Success
Powers (Act within them)
Independent Judgment
Reasonable Skill and Care
Interest Declaration
No Benefits

Question 22

ASPIRIN

Answer 22

key duties directors ASPIRIN

Accountability
Success
Powers (Act within them)
Independent Judgment
Reasonable Skill and Care
Interest Declaration
No Benefits

Question 23

What does “To act within powers” require from a director?

Answer 23

Acting in accordance with the company’s constitution.
Exercising powers only for the purpose for which they were conferred.

Question 24

What happens if directors exercise their powers for a collateral purpose?

Answer 24

The transaction becomes invalid unless it is approved or ratified by the company in a general meeting.

Question 25

What is the restriction on voting when directors misuse their powers for share allotment?

Answer 25

Votes attached to new shares issued irregularly cannot be used to influence decisions at the general meeting.

Question 26

How can an irregular transaction by directors be rectified?

Answer 26

Through approval or ratification by the company in a general meeting.

Question 27

How should directors promote the success of the company? 6

Answer 27

By acting in good faith and considering:

Long-term consequences of decisions.
Employees’ interests.
Relationships with suppliers, customers, and others.
Impact on the community and environment.
Reputation for high standards of business conduct.
Acting fairly among members.

Question 28

How must directors exercise independent judgment?

Answer 28

By making their own decisions, except where:
The company constitution restricts them, or
Agreements legally limit their discretion.

Question 29

What defines reasonable skill and care for a director?

Answer 29

General skill and experience expected of a reasonably diligent person.
Actual knowledge, skill, and experience the director possesses.

Question 30

What is the duty to avoid conflicts of interest?

Answer 30

Directors must avoid situations where their personal interests conflict with company duties unless authorized.

Question 31

Under what conditions is a conflict of interest not considered a breach of duty? 2

Answer 31

In a private company, if the company’s constitution does not invalidate such authorization.
In a public company, if the company’s constitution expressly allows such authorization.

Question 32

Can a director vote on a matter where they have a conflict of interest?

Answer 32

No, the relevant director cannot count towards a quorum, and their votes will not be included in determining whether authorization is given.

Question 33

When does the duty to avoid a conflict of interest not apply?

Answer 33

This duty does not apply when the director has declared their interest in a proposed transaction.

Question 34

What must a director do when they recognize a potential conflict of interest?

Answer 34

They must disclose their interest to the company, as failure to do so can result in a breach of their fiduciary duties.

Question 35

What does the duty not to accept benefits from third parties entail?

Answer 35

A director cannot accept benefits:
- Due to their role as a director.
- By doing (or not doing) anything as a director.
Exceptions occur if the benefit cannot reasonably be regarded as likely to cause a conflict of interest.

Question 36

How should a director declare an interest in a proposed transaction?

Answer 36

The director must declare the nature and extent of their interest:
1. At a board meeting.
2. By notice in writing.
3. Through a general notice of interest.
Declarations are not needed if the company’s constitution does not require it, or if it involves a substantial non-cash asset transfer. - ask ‘what would a reasonable person think’ ‘would you be influenced by the gift, if so don’t accept’

Question 37

Directors must declare the nature and extent of any such interest (direct or indirect) to the other directors, unless it cannot reasonably be regarded as likely to give rise to a conflict of interest. How can they do this? 3

Even when such declaration is made, there is no need for approval by the members or the board, unless: 2

Answer 37

The notice may be made:
 At a board meeting
 By notice in writing or
 By a general notice, i.e. that he has an interest in the third party and is therefore to be regarded as interested in any transaction or arrangement with that third party (in which case he should take reasonable steps to ensure that such general notice is brought up at the next board meeting).

Even when such declaration is made, there is no need for approval by the members or the board, unless:
 The company’s constitution requires it or,
 Unless it is an arrangement between a director and the company for the transfer of a ‘substantial non-cash asset’

Question 38

What are the consequences if a director breaches their duties? 5

Answer 38

The director may be required to:
Make good any loss suffered by the company.
Surrender any secret profits.
Face voidable contracts.
Return property taken from the company.
Be subject to injunctions for ongoing breaches.

Multiple directors in breach share joint and several liabilities.

Question 39

What are the responsibilities of administrators, receivers, and liquidators under statutory controls on directors’ behavior?

Answer 39

They must assess whether to apply to the court for an order under wrongful or fraudulent trading rules, requiring directors to contribute to company assets as deemed “just and reasonable.”

Question 40

Who do administrators, receivers, and liquidators have a statutory duty to report to if the company is being mismanaged?

Answer 40

They also have a statutory duty to report to the Department for Business, Innovation and Skills (BIS) on directors of companies in whose affairs they have become involved, where they believe the conditions for a disqualification order have been satisfied.

Question 41

When must the Secretary of State apply to the court for disqualification of directors?

Answer 41

Within two years of the company becoming insolvent, if conditions for a disqualification order are met.

Question 42

Define wrongful trading.

Answer 42

When a company goes into insolvent liquidation, and the director(s) knew or should have known that there was no reasonable prospect of avoiding this outcome.

Question 43

What standard is applied to assess wrongful trading?

Answer 43

The standard of a reasonably diligent person with expected knowledge, skill, and experience of a comparable director.

The standard expected of a listed company director would be higher than for the director of a small owner-managed private company.

Question 44

What is the consequence for directors found guilty of wrongful trading under Section 214?

Answer 44

The court may order them to make contributions to the company’s assets as deemed appropriate.

Where a director is liable under s 214 the court can order him to ‘make such contribution to the assets of the company as the court thinks proper’.

Question 45

Define fraudulent trading.

Answer 45

When a company’s business is carried out with intent to defraud creditors or for fraudulent purposes.

Question 46

What constitutes “carrying on business” in fraudulent trading cases?

Answer 46

A single transaction or payment of debts qualifies as carrying on business.

Question 47

What are the consequences of fraudulent trading?

Answer 47

Criminal Offense: Punishable by up to 10 years of imprisonment and/or a fine.

Civil Offense: Court may order contributions to the company’s assets.

Question 48

What is the purpose of the Company Directors Disqualification Act (CDDA) 1986?

Answer 48

To prevent directors of failed companies from managing other companies without personal liability.

Question 49

What are grounds for disqualification for up to 15 years?

Answer 49

Serious offenses, fraudulent trading, Secretary of State’s application, breaches of competition law, or wrongful trading participation.

Question 50

What are grounds for disqualification for up to 5 years?

Answer 50

Persistent default in complying with company legislation (e.g., three convictions in five years).

Question 51

What are grounds for mandatory disqualification (2 to 15 years)?

Answer 51

nsolvency-related misconduct, even if the director took no active part in the company’s operations.

Question 52

What alternative to disqualification may the Secretary of State accept?

Answer 52

Undertakings by the director to refrain from managing companies in uncontested cases.

Question 53

What are the consequences of breaching a disqualification order?

Answer 53

What are the consequences of breaching a disqualification order?

Question 54

What factors may reduce the disqualification period?

Answer 54

Lack of dishonesty, personal financial loss, absence of excessive remuneration, mitigation efforts, and low reoffending likelihood.

Question 55

Who qualifies as a member of a company?

Answer 55

Anyone listed in the company’s register of members, typically referred to as shareholders when they own shares.

Question 56

What governs the regulation of members?

Answer 56

Members are bound by the company’s articles of association, which act as a binding contract among members and the company.

Question 57

What are the key rights of a member? 2

Answer 57

To receive annual accounts and reports.
To require directors to call a general meeting.

Question 58

What actions require member approval for directors? 4

Answer 58

Directors’ service contracts longer than 2 years.
Substantial property transactions.
Loans to directors.
Payments for loss of office.

Question 59

What are the consequences of a breach in member approval requirements? 3

Answer 59

Contracts may be terminated.
Transactions are voidable unless approved.
Directors may be held accountable for losses.

Question 60

Minority protection - Can minority shareholders sue?

What exceptions exist to the rule in Foss v Harbottle?

Answer 60

Minority shareholders cannot sue if their grievances can be resolved by a majority vote, as the company itself is the correct claimant. But there are exceptions.

What exceptions exist to the rule in Foss v Harbottle?
Actions that are ultra vires.
Fraud on the minority.
Breach of personal rights of members.
Directors acting illegally.

Question 61

HIGHLY EXAMINABLE
Minority protection - Where statute gives specific powers- 5

Answer 61

Cancellation of variation of class rights
≥15% of class of shares

Right to call a company meeting
≥5% of shares

Notice of members’ resolutions
≥5% of shares

Payment out of capital by private company for the redemption or purchase of its shares
Any shareholder (or creditor) can apply to court to prohibit this

Registration of limited company as unlimited
Any member can prevent this

Question 62

What is a derivative action?

Answer 62

A member’s right to sue on behalf of the company for director negligence, default, or breach of duty.

Question 63

What factors does the court consider for derivative actions? 6

Answer 63

 Whether the member is acting in good faith
 The importance that a person promoting the success of the company would attach to it
 Whether authorisation or ratification by the company by the company is likely
 Whether the company has decided not to pursue the claim
 Whether its member could pursue the claim in his own right rather than on behalf of the company
 The views of members with no personal interest in the matter

Question 64

What constitutes unfairly prejudicial conduct?

Answer 64

Actions that harm the interests of members, such as exclusion from management, misuse of funds, or improper share allotments.

Question 65

What factors are NOT considered unfairly prejudicial conduct? 4

Answer 65

Failure to pay debts of a subsidiary.
Complying with Stock Exchange rules.
Reasonable offers to buy minority shares.
Complaints based on employment issues.

Question 66

What are the consequences of a successful unfair prejudice petition? 5

Answer 66

Regulating future company affairs.
Allowing legal proceedings.
Requiring specific actions or prohibitions.
Purchasing shares at a fair value.
Requiring the company to make any (specified) alterations to its articles, or not to make such alterations without leave of the court

Question 67

What does “just and equitable winding up” mean?

Answer 67

It refers to a member’s right to petition the court for the dissolution of a company when they are dissatisfied with the management or conduct of directors or controlling shareholders, provided no other remedies are available

Question 68

Why is just and equitable winding up considered a remedy of last resort?

Answer 68

Because it involves winding up a potentially viable company, which is a drastic measure, only taken when no other solutions can address the grievances.

Question 69

Under what circumstances might a company be wound up on just and equitable grounds? 3

Answer 69

If the company was formed for an illegal or fraudulent purpose.
If there is a complete deadlock in management, making decision-making impossible.
If directors deliberately withhold information, eroding shareholders’ confidence in the management

Question 70

Why is a deadlock in management considered grounds for just and equitable winding up?

Answer 70

Because a complete deadlock prevents the company from operating effectively, leaving no alternative for resolving disputes.

Question 71

How does withholding information by directors lead to just and equitable winding up?

Answer 71

If directors deliberately conceal important information, it can undermine trust and confidence among shareholders, making continued operation of the company untenable.

Question 72

Who can call a general meeting and what are the notice requirements? 3

Answer 72

Company Director: 14 days’ clear notice, reduced if 90% (95% for PLCs) of shareholders consent to short notice.

Members with ≥5% shares: Must give directors 21 days’ notice, and the meeting must occur within 28 days.

Auditor: If resigning, they must provide a statement of circumstances and request a meeting.

Question 73

When can the court or a PLC in crisis call a general meeting? 2

Answer 73

Court: On its own motion or at the request of a shareholder.
PLC in crisis: When net assets fall to half or less of the called-up share capital.

Question 74

What is the requirement for AGMs in public companies?

Answer 74

A public company must hold an AGM:

Every financial year.
Within six months after the accounting reference date.
Failure to comply may result in fines.

Question 75

What is the notice period for an AGM, and can it be shortened?

Answer 75

The notice period is 21 days, but all members can consent to short notice.

Question 76

What is the notice period for an AGM, and can it be shortened?

Answer 76

The notice period is 21 days, but all members can consent to short notice.

Question 77

What are the main business items addressed in an AGM? 3

Answer 77

Appointment of directors and auditors.
Approval of accounts.
Approval of dividends.

Question 78

What majority is needed for an ordinary resolution, and what is it used for?

Answer 78

Requires >50% majority and is used for general business not requiring a special resolution.

Question 79

What majority is needed for a special resolution, and what is it used for?

Answer 79

Requires ≥75% majority and is used for:

Change of name.
Alteration of articles.
Reduction of share capital.
Winding up the company.

Question 80

What are the requirements for a special resolution? 2

Answer 80

The resolution text must be included with the meeting notice.
Must be filed with the Registrar within 15 days.

Question 81

What is a written resolution, and what timeframe applies to private companies?

Answer 81

Used by private companies for most business matters.

Must be passed within 28 days of circulation.
Requisite majority must be reached, and decisions cannot be changed after the vote.

Question 82

What can not be in a written representation (private companies)? 2

Answer 82

Anything relating to removal of director or auditor

Question 83

When is special notice required, and what is the timeframe?

Answer 83

Special notice requires 28 days’ notice for the removal of a director or auditor.

Question 84

When sending notice for an AGM meeting what days do we not count?

Answer 84

Notice periods exclude the day the notice is given and the day of the meeting

Question 85

Do parents company have liability to pay debts of a subsidiary?

Answer 85

No liability as they are separate entities therefore liable for their own debt

Question 86

What does ‘diversion of a company’s business to a director controlled company’ mean?

Answer 86

Shareholders essentially left with a shell company with noting in t when all the lucrative business has gone through a different company’s returns are diminished

Question 87

If notice is given post for AGMs how long should be given to allow post to arrive?

Answer 87

48hrs

Question 88

What does a statement of the circumstances state - given by an auditor when they resign?

Answer 88

Can either say
1. ‘nothing special to bring to attention of shareholders, we have decided to resign ….’ - could be a familiarity risk as worked with company for too long

OR

2. State why they feel they have to resign

Question 89

What is the minimum quorum required for meetings under the Companies Act?

Answer 89

A minimum of 2 members, unless the company has only one member.

Question 90

How are votes cast initially at a meeting?

Answer 90

Votes are cast by a show of hands unless a poll vote is demanded.

Question 91

What is a poll vote?

Answer 91

Shareholders might have more shares may request this as a vote
so 10 shares = 10 votes has more weight than 1 share

Each member (or proxy) casts votes proportional to their shareholding as per the company’s articles, and the show of hands vote is disregarded.

Question 92

How long must records of meetings be kept, and what should they include?

Answer 92

Records must be kept for 10 years and include minutes and resolutions, available for inspection by members.

Question 93

What are class meetings, and when are they held?

Answer 93

Class meetings are held for specific classes of shareholders or debenture holders when a company has different share classes. Statutory provisions for meetings and resolutions also apply.

Question 94

Can a single member conduct business without formal notice or minutes?

Answer 94

Yes, a single member can conduct business informally, but they must provide a written record of decisions made.

Question 95

What must a single member comply with when conducting business?

Answer 95

They must comply with normal filing requirements, ensuring written resolutions are recorded.

Question 96

INTERACTIVE QUESTION 19: UNFAIRLY PREJUDICIAL CONDUCT

Are the following likely to amount to unfairly prejudicial conduct under s 994 CA’06?

YES OR NO
A Failure of a parent company to pay the debts of its subsidiary.
B Diversion of the company’s business to a director-controlled company.
C Failure to call a general meeting.
D Late presentation of the company’s accounts.

Answer 96

A No
B Yes
C Yes
D No

Question 97

Worked example 18: Director’s duties

Xray Ltd intends to enter into a contract for the supply of medical supplies from a firm in which Xavier, a director of Xray Ltd, is a partner. The terms of the contract are no less onerous than those of contracts between the company and other suppliers, but nonetheless Xavier is concerned that he may commit an offence if the contract goes ahead due to his interest in the firm.

Advise Xavier.

Answer 97

Xavier is under a duty to avoid any situation in which he has an interest that, even potentially, conflicts with the company’s interests, even if the company is not actually prejudiced as a result (it may even fair better as a result). However, this duty does not apply to a conflict of interest arising in relation to a transaction with the company, as is the case here. The relevant duty, with which Xavier must comply, is a duty to disclose his interest to the other directors pursuant to s 177. He should make such disclosure at a board meeting or in writing. He could provide a general disclosure of the nature and extent of his interest in the firm, so that he is to be regarded as interested in any transaction with it. Such general notice should be given at a board meeting or brought up at the next meeting following it. If he fails to do so, the contract will be voidable at the instance of the company and he could be liable to indemnify the company against any loss.