Director’s Duties

Question 1

What does s.170 and 170(1) CA2006 say?

Answer 1

s. 170 CA2006 = the now codified duties are based on previous common law and equity, which still stands
s. 170(1) CA2006 = the general duties are owed by a director to the company

Question 2

Who can bring a claim against a director for a breach of duty?

Answer 2

Only the company itself and those empowered to bring claims on the company’s behalf can commence proceedings for breach of duty

Question 3

What does s.170(5) CA2006 say?

Answer 3

Duties apply to shadow directors if capable of applying to shadow directors

Question 4

Which duties can apply to shadow directors?

Answer 4

Duties is s.175 and 176 CA2006

Question 5

What does s.179 ca2006 say?

Answer 5

duties are cumulative so more than 1 may overlap in a given case

Question 6

What are the 2 duties under s.171 CA2006

Answer 6

1. (a) a duty to act in accordance with the company’s constitution
2. (b) a duty to only exercise powers for the purposes for which they are conferred

Question 7

What are the remedies for a breach of s.171(a)?

Answer 7

Agreements remain valid but director required to account for gains or compensate the company for losses it sustained, as a result of the breach

Question 8

What is the test for determining a breach of s.171(b) and the 4 steps?

Answer 8

Howard Smith Ltd v Ampol Petroleum Ltd = courts examine the substantial purpose and decide whether that purpose was proper or not

The court will determine:

1. What power is being exercised
2. The proper purpose for which that power was delegated to the directors
3. The substantial purpose for which the power was exercised
4. If that purpose was proper (if yes, no breach)

Question 9

What are the remedies for a s.171(b) breach?

Answer 9

any agreement is voidable at the company’s instance but can be enforced by a 3rd party if the director had the authority to enter into it. Director required to account for gains or compensate the company for losses it sustained, as a result of the breach

Question 10

What does S.172 CA2006 say?
What amounts to success?
Who’s interests prevail?

Answer 10

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

What amounts to success will depend on what the company itself regards as success

If company’s and member’s interest conflict, no breach if director favours the company’s interests

Question 11

Is the s.172 duty subjective or objective?

Answer 11

The duty is subjective = if decision was honest, no breach of duty even if decision was unreasonable

If the director did not consider this, an objective approach will be used

Question 12

What are the 6 factors directors must have regard to under s.172 ca2006?

Answer 12

Directors must have regard to:

1. The long term consequences
2. Employees’ interests
3. Fostering business relationships with suppliers, customers and others
4. Environmental and community impact
5. Desirability of maintaining a high standard reputation
6. Acting fairly

Question 13

What are the remedies for a s.172 breach?

Answer 13

agreement is voidable at the company’s instance, director required to compensate the company for any losses it sustained, as a result of the breach

Question 14

What does s.173 CA2006 say?

Answer 14

s.173 CA2006 = directors must exercise independent judgment

Question 15

What are the 2 instances where a s.173 breach doesn’t occurr?

Answer 15

1. S.173(2)(a) = if a director acts in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors
   = codification of a common law principle = directors can fetter their discretion if they believe it is in the company’s interests
2. S.173(2)(b) = where the director acts in a way that is authorised by the company’s constitution

Question 16

What are the remedies for a s.173 breach?

Answer 16

agreement is voidable at the company’s instances and director may be required to account for any gains made or compensate the company for any losses sustained

Question 17

What does s.174 CA2006 say? And what is the care, skill and diligence expected? How is this different from previous common law?

Answer 17

S.174 CA2006 = director must exercise reasonable care, skill and diligence

S.174(2) CA2006 = the care, skill, and diligence expected of a director is that which would be exercised by a reasonably diligent person with:

(a) the general knowledge, skill, and experience that is reasonably expected by a director (objective test)
(b) the general knowledge, skill, and experience that the director has (subjective test)

If director has a particular skill, standard of care expected is higher
Prior common law standard was only subjective = little skill or knowledge = low standard of care

Question 18

What are the 2 principles of how the s.174 duty should be applied? When will directors be in breach in relation to delegation?

Answer 18

Re Barings plc (No 5) [1999] = 2 principles on how the standard should be applied:
1. Directors have a continuing duty to acquire and maintain sufficient knowledge and understanding of the company’s business to effectively carry out duties as a director
○ Directors may rely on professional advisors and if provided with inaccurate information a breach may not occur
○ If the director knew or ought to have known information was inaccurate = possible breach

2. Directors have a duty supervise the discharge of delegated functions
   ○ Generally, a director will not breach s. 174 if he delegates a function to another person and that person performs that function unlawfully or with little skill and care
   ○ 3 exceptions where director will breach for the delegate’s actions:
3. If fail to exercise reasonable skill and care when deciding whom to delegate to
4. If fail to supervise the persons they have delegated their powers to
5. If delegates all functions and becomes inactive in running the company = almost certainly in breach

Question 19

What are the remedies for a s.174 breach?

Answer 19

director required to compensate the company for any loss it sustains due to his breach of the s. 174 duty

Damages are awarded

Question 20

What does s.175 CA2006 and when does it apply?

In particular to?

Answer 20

S.175 CA2006 = directors must avoid situations where there is a direct or indirect conflict of interest with the company

Only applies to conflicts that arise from transactions or arrangements with 3rd parties

Applies particularly to the exploitation of any property, information or opportunity (whether the company could take advantage or not)

Question 21

When does s.175 not apply? (2)

Answer 21

Directors must avoid situations where there is a direct or indirect conflict of interest with the company.
Does not apply:
1. To conflicts that arise in relation to a transaction or arrangement with the company itself (These conflicts are covered by s.177 and 182 CA2006)
2. Where the situation cannot reasonably be likely to give rise to a conflict of interest

Question 22

Does s.175 apply to former directors? Why? When?

Answer 22

Yes, to prevent them vacating office and using information acquired to compete with the company or for own gain

Resigning and setting up a rival business is not a breach of s.175:
Breach only if exploits any property, information or opportunity which he became aware of at time of his appointment as director

Question 23

When will there be no breach of s.175? Who can authorise this and type of companies? And what are 3 specific things about authorisation?

Answer 23

No breach where the conflict has been authorised by the company or the directors

1. Directors can’t authorise a conflict if statute requires member approval
2. Private company = directors may authorise unless constitution does not invalidate authorisation (MA don’t)
3. Public company = directors may only authorise if articles enable them to (MA don’t)

Authorisation:

1. Must be obtained prior to the agreement
2. Is only valid if conflict director does not count towards the quorum and his vote is not counted
3. May avoid director being in breach of S.175, but not breaches of other duties

Question 24

What are the remedies for a s.175 breach?

Answer 24

Contract is voidable at company’s instance as long as the other party knew of the breach. Director required to account for any gains made

Question 25

What does s.176 say? And what are 3 benefits that are okay to receive?

Answer 25

S.176 CA2006 = a director must not accept a benefit from a 3rd party conferred by reason of his being a director, or his doing (or not doing) anything as a director

Certain benefits not within s.176 CA2006 and are okay to receive:

1. a benefit received from the company or a person acting on behalf of the company
2. a benefit received from a person by whom his services are provided to the company
3. a benefit that cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 26

When will there be no breach of s.176 CA2006? (2)

Answer 26

No breach if:

1. the benefit has been approved by the members
2. the articles contain provisions for dealing with conflicts of interest, and the director acts in accordance with those provisions

Question 27

What are the 3 remedies of a s.176 breach? When will an offence be committed?

Answer 27

Remedies:

1. Contract that provides for the benefit can be rescinded by the company
2. Company can recover the benefit from the director, or claim damages from the director or 3rd party
3. Company can summarily dismiss the director

An offence will be committed if benefit amounts to a bribe (s.2 Bribery Act 2010)

Question 28

What does s.177 CA2006 say? When does it apply?

Answer 28

s.177 CA2006 = director must declare to the other directors the nature and extent of any interest in a proposed transaction or arrangement

applies where:

1. transaction or arrangement is with the company - e.g. When the director contracts with the company
2. where company A contracts with company B and the person is a director of A and a shareholder of B
3. Company A contracts with a connected person of the director (s.252)

If with 3rd party, s.175 applies, not s.177

Question 29

How can a person avoid a breach of s.177 CA2006? What 4 instances will declaration not be required? What happens after declaration?

Answer 29

To avoid breach, declaration must be before the transaction or arrangement is entered into

Declaration will not be required where:

1. Director is not aware of the interest, transaction, or arrangement
2. The interest cannot reasonably be likely to give rise to a conflict of interest
3. Other directors are already aware of the interest
4. The interest concerns the terms of the director’s service contract that have been or are to be considered by the directors

Once declaration declared, the board vote
MA = director with interest cannot vote or count towards the quorum

Question 30

What is the remedy for a s.177 breach?

Answer 30

Transaction or arrangement voidable at company’s instance

Director faces no liability!

Question 31

What does s.182 CA2006 say? What are the 3 differences between s.177 and s.182?

Answer 31

S.182 CA2006 = director must declare to the other directors the nature and extent of any interest in an existing transaction or arrangement

3 differences between s.177 and s.182:

1. s.177 applies to proposed transactions or arrangements, s.182 applies to existing ones
2. Declaration: s.177 = must be made before transaction/arrangement entered into, s.182 = must be made as soon is reasonably partitionable
3. Consequences of breach: s.177 = civil only, s.182 = criminal offence

If director doesn’t make a declaration before or after transaction/agreement, can be in breach of s.177 and s.182

Question 32

What are the 3 ways directors can avoid liability and the limitations of each?

Answer 32

1. Through a provision in the articles of employment contract excluding or limiting his liability
   • Limited by s.232 CA2006 = any provision that purports to exempt a director from any liability in connection to negligence, default, breach of duty, or breach of trust is void
2. Through a provision in the articles or service contract indemnifying the director for any liability he may face
   • Limited by s.232 CA2006
3. By seeking to be relieved from liability
   a. Ratification = s.239 CA2006 = members can ratify the conduct of a director that amounts to negligence, default, breach of duty or breach of trust by passing a resolution of the members or unanimous consent
   ○ Illegal acts and acts which are not bona fide and honest cannot be ratified
   b. Relief from the court = s.1157 CA2006 = the court may relieve director of liability if he acted honestly and reasonably, and he ought fairly to be excused
   ○ Relief from liability cannot be granted where the director was completely inactive or liable for wrongful trading

Question 33

What does s.188 CA2006 say? Only when must the resolution be passed? What happens if the provision is not approved? What if the company has a premium listing?

Answer 33

S.188 CA2006 = provisions guaranteeing directors 2 or more years of employment with the company cannot be agreed to unless approved by a resolution of the members

The resolution mustn’t be passed until all members have seen a copy of the proposed contract incorporating the provision

The provision in question needs to be approved – not the entire contract

If provision not approved, provision is void but remainder of contract is valid (company can terminate at any time by giving reasonable notice)

If company has a premium listing = Prov.39 UK CG Code = contract periods should be one year or less

Question 34

What does s.190 CA2006 say? What is a non-cash asset? What is a substantial non-cash asset?

Answer 34

S.190 CA2006 = arrangements where a director or connected person acquires a substantial non-cash asset from the company or vice versa cannot be made unless approved by resolution of the members

Non- cash asset = any property or interest that is not cash

Substantial non-cash asset = over £100,000 or exceeds 10% of the company’s asset value and is more than £5,000

Question 35

When will member approval not be required for a s.190 substantial property transaction? (6 instances)

Answer 35

1. Transaction relates to anything director is entitled to under his service contract
2. Transaction relates to director’s payment for loss of office
3. Transaction is between a company and member
4. Transaction is between a holding company and its wholly-owned subsidiary, or between two wholly-owned subsidiaries of the same holding company
5. Company is being wound up (unless a members’ voluntary winding up)
6. Company is in administration

Question 36

What are the 2 remedies for a breach of a s.190 substantial property transaction?

Answer 36

S.190(3) CA2006 = If member approval is required but not obtained, the company is not liable

•Remedies:
1. Transaction voidable at the company’s instance
○ Unless approved by a resolution of the members within a reasonable period of the company entering into it
2. Any director or connected persons who authorised the transaction is liable to account for any gain made, and jointly and severally liable to indemnify the company for any loss or damage
○ No liability if didn’t know of the relevant circumstances that constituted the contravention at the time of entering the transaction

Question 37

What does s.197, 198, and 201 CA2006 say about public companies needing member approval?

Answer 37

s.197 CA2006 = a company cannot make a loan to a director or give a guarantee/provide security for a loan made by any person to a director
• Must be approved by a resolution of the members unless loan is under £10,000

S.198 CA2006 = a public company cannot make a quasi-loan to a director or give a guarantee/provide security for a quasi-loan made by any person to a director
• Must be approved by a resolution of the members unless quasi-loan is under £10,000

S.201 CA2006 = a public company cannot enter into a credit transaction as creditor for the director or connected persons, or give a guarantee/provide security for a credit transaction made by any person to a director or connected persons
• Must be approved by resolution of the members unless value is under £15,000

No member approval required for transactions with value less than £50,000

Question 38

What is a quasi-loan?

Answer 38

Quasi-loan = transaction where creditor agrees to pay or reimburse another party for the borrower’s (director’s) debts on the terms that the borrower (director) will repay or reimburse the creditor

Question 39

What are the remedies for a breach of s.197, s.198 , and s.201?

Answer 39

Remedies:
1. Transaction voidable at the company’s instance
○ Unless approved by a resolution of the members within a reasonable period of the company entering into it
2. Any director or connected persons who authorised the transaction is liable to account for any gain made, and jointly and severally liable to indemnify the company for any loss or damage
○ No liability if didn’t know of the relevant circumstances that constituted the contravention at the time of entering the transaction

Question 40

What are the rules for loss of office payments for unquoted companies?
What are the consequences of a breach? (2)

Answer 40

s.217 CA2006 = company cannot make a payment for loss of office to a director unless payment approved by resolution of the members

Consequences of no member approval when required:

1. Recipient of the payment holds it on trust for the company that made the payment
2. Any director who authorised the payment is jointly and severally liable to indemnify the company that made the payment for any loss resulting from it

Question 41

What are the rules for remuneration payments and loss of office payments for quoted companies? What are the 2 consequences of a breach?

Answer 41

S.226B and C CA2006 = company cannot make a remuneration payment or payment for loss of office to a director unless :

1. Payment is approved by resolution of the members or
2. Is consistent with the approved directors’ remuneration policy

Consequences of payment made in breach:

1. Recipient of the payment holds it on trust for the company / other person that made the payment
2. Any director who authorised the payment is jointly and severally liable to indemnify the company that made the payment for any loss resulting from it

Question 42

What is the enlighten shareholder value approach under s.172 ca2006?

Answer 42

Long-term financial gain is best achieved if the company takes into account the interests of wider stakeholder groups as well as its members

Question 43

Will a conflict of duties amount to a conflict of interest under s.175?

Answer 43

Yes!

Question 44

When can breaches of duty not be ratified by shareholders?

Answer 44

If the company is insolvent.