Company 4: Directors

Question 1

What happens to acts of person acting as director if it is later discovered there was a defect in their appointment, they had been disqualified from office, they ceased to hold office or did not have voting power (if vote)?

Answer 1

• acts are still valid

Question 2

Directors Duties (who are they owed to and what are they)?

Answer 2

Duties are to company and not members

• Fiduciary duties (act in good faith in interest of the company)
• duty to act within powers
• duty to promote success of company
• duty to exercise reasonable car, skill and diligence
• duty to exercise independent judgement
• duty to avoid conflict of interest
• duty not to accept benefits from 3rd parties
• duty to declare interest in propose or existing transactions or arrangements

Question 3

What is the Directors Fiduciary Duty? Can liability be exempted?

Answer 3

Must act in good faith and in best interest of the company as a whole

Attempt in Articles or contract to exempt liability is void
- but company can get insurance or indemnify directors (except for criminal or regulatory fines)

Liability for acts done whilst director continue even after they leave position

Question 4

Directors Duty to act within powers

Answer 4

Director must act in accordance with company’s constitution and exercise powers only for specified purpose

Question 5

Duty to promote success of company?

Answer 5

Must act in way they (subjectively) consider in good faith, would promote success of company for members as a whole

Must have regard to
- Likely long-term consequences
- Interests of employees
- Need to foster business relations (supplier, customer etc.)
- Impact on community and environment
- Maintaining reputation for high standards of business conduct
- Need to act fairly

Changes if company is insolvent or on brink of insolvency
- directors must then consider in interest of creditors

Question 6

What is the Directors Duty to exercise reasonable care, skill and diligence? What is the standard?

Answer 6

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

• general knowledge, skill and experience that may reasonably be expected of a person carrying out their functions (objective); and/or
• the general knowledge, skill and experience the director in question actually has (subjective)

Second standard used for those with specialist skill or knowledge.

Question 7

What its he Director’s Duty to Exercise Independent Judgement? When is this not breached?

Answer 7

A director of a company must exercise independent judgment.

No breached by acting:
a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors;
b) in a way authorized by the company’s constitution; or
c) seeking expert advice, provided he still comes to own decision.

Question 8

Directors Duty not to accept benefits from 3rd Parties

Answer 8

Cannot accept benefit from third party conferred by reason of being director.
- eg. bride from supplier who is not best for company as more expensive ect.

Exception
Where the benefit cannot reasonably be regarded as likely to give rise to conflict of interest

Question 9

Can a company make loans to directors

Answer 9

No cannot make loans, guarantee or give security for loan UNLESS transaction has been approved by members of company

Question 10

How are board meetings called?

Answer 10

• any director can call with reasonable notice / giving company secretary power to give reasonable notice
• what is reasonable will depend on the facts (can be a few minuets)
• notice to be given to all directors unless they have waived their rights to receive it

Notice to include:
- time, place, means of communication

Question 11

Requirements and process of Voting at Board Meetings?

Answer 11

Quorum is two (but not including director who has interest in transaction)

Most votes done by simple majority
- chairman has deciding vote incase of tie

Question 12

Written Board Resolutions

Answer 12

Can pass written resolutions without a meeting

Only approved if decision is unanimous

Question 13

When do directors not count to quorum for board meetings

Answer 13

• decision is something they have an interest in
• meeting is to agree on their service contract

Question 14

Directors rights to Compensation and Expenses

Answer 14

Model Articles say that board may decide what constitutes fair compensation for directors when deciding on their service contract

Company may pay reasonable expenses directors incur in connection with attending meetings

Question 15

Process for the Removal of Directors? What might prevent this?

Answer 15

shareholder decision
- majority vote (ordinary resolution)
- shareholder seeking this to give 28 days notice
- director right to make written representations (to be sent to all shareholders) to speak at meeting

• Cannot be done by written resolutions

Bushell v Faith clause
- gives shareholder/directors weighted voting of a factor great enough that other shareholders cannot get the majority need to vote them out (way the director/shareholder can entrench themselves)

Removal may trigger contract rights such as payment to compensate loss of office and damages for termination of service contract

Question 16

Retirement Rules for Directors at Public Companies

Answer 16

Model Articles provide

First AGM all directors to retire from office

Every subsequent AGM retirement (and reappointment) of:
- any directors appointed by directors hired since last AMG; and
- any directors not appointed/reappointed in last two AGM (been director for over two years)

Question 17

When can Disqualification of Directors apply?

Answer 17

Can be disqualified under CDDA for either:

General Misconduct
- offence inconnection with promotion, formation, management, liquidation of company
- persistent failure to file with Registrar of Companies
- conviction related to failure to file with Registrar of Companies
- fraud (inc. fraudulent trading)

Unfitness:
- for being unfit director of insolvent company
- for wrongful trading
- for being bankrupt
- by SoS through application to court if investigation shows disqualification is in public interest
(can be disqualified of 2-15 years)

Question 18

How is company secretary appointed / disqualified

Answer 18

Usually by directors

Question 19

Requirements for Company Secretaries of Public Companies?

Answer 19

Must take reasonable steps to ensure they have requires knowledge and experience and has one or more of:

• has held same office in public company for at least 3/5 years before appointment
• is member of specialised list of accountancy/secretarial bodies
• is a barrister, advocate or solicitor in UK
• is person who, by virtue of holding/having held any other position or being member of any other body, appear to the directors to be capable of discharging function

Question 20

Powers and Duties of Company Secretary

Answer 20

Is an office of the company (like directors)

No prescribed duties under law, but normally maintain books and records, takes minuets at shareholder/board meetings and makes sure company is compliant with statutory obligations (ie CH filing)

Question 21

Are all companies required to have Company Auditors? What is the their purpose?

Answer 21

Under CA all companies must prepare accounts
- Large companies required to hire specialist accountant known as auditor

Small companies:
- annual turn-over UP TO £10.2m; or
- up to 50 employees; or
- UP TO £5.1m on balance sheet

Question 22

What are the consequences of a directors breach of duty? Can this be remedied?

Answer 22

• must compensate company for any loss incurred as result of breach; and
• account to company for any profit they made from breach

Remedy
- shareholders can ratify conduct of directors with ordinary resolution
- if director is shareholder their vote is disregarded

Question 23

How might a director breach duty to avoid conflict of interest?

Answer 23

Avoid situations that have or can have
- direct conflict of interest (personal)
- indirect (benefits close relative, some other business they have significant interest)

May related to:
- exploitation of property
- exploitation of information
- exploitation of opportunity
- secret profit

Question 24

When will a director not breach their duty of conflict of interest?

Answer 24

• transaction with company itself that board knowns they have interest in
• situation cannot reasonably be regarded as likely to give rise to a conflict of interest
• the matter has been authorised by the directors

Question 25

How may directors make a secret profit? Can this be discharged?

Answer 25

Can be authorised by directors.

For example, if they subscribe for shares of companies subsidiary which results in profit at exit.

Question 26

When must directors declare interest in transactions? How must they declare this?

Answer 26

Have to give notice of any interest (direct or indirect)
- in proposed transaction/arragement; or
- new interest in existing transaction (before transaction can progress)

Notice:
- can be written or oral at meeting
- to include nature and extent of interest

Question 27

What is the effect of a director having an interest in a transaction?

Answer 27

If a director has an interest in a transaction
- they no longer court towards quorum

Question 28

When does a director not have to declare interest in a transaction?

Answer 28

• if not reasonably be regarded as likely to give rise to conflict of interest
• other directors are aware
• concerns terms of the directors service contract that have been or are to be considered by board

Question 29

Can board meetings be online or by phone?

Answer 29

Yes
- MA require that each director is able to communicate

Question 30

Can the Company Secretary bind the company?

Answer 30

Yes even through implied or apparent authority if:
- contracts were of an administrative nature
- meaning of the type that a 3rd party could reasonably assume would be within the powers of the company secretary