Director's duties and responsibilities

Question 1

Who are the directors accountable to?

Answer 1

Company

Question 2

De jure director

Answer 2

Validly appointed director

Question 3

Minimum directors - private company

Answer 3

1

Question 4

Minimum directors public company

Answer 4

2

Question 5

De facto director

Answer 5

Assumes to act as a director but has in fact not been validly appointed
The fiduciary duties and liabilities apply to de facto directors as they do to de jure directors

Question 6

Shadow director

Answer 6

a person in accordance with whose directions or instructions the directors of the company are accustomed to act but not validly appointed
Professional advisers are NOT shadow directors
Example: a friend of a director who gives advice from ‘behind the scenes’, which the directors follow, would be seen as a shadow director
Duties and obligations apply to shadow directors as well

Question 7

Executive director

Answer 7

Appointed to an executive office like finance director

Question 8

Non-executive director

Answer 8

A non-executive director is also an officer of the company but will not be an employee of the company. Non-executive directors do not take part in the day-to-day running of the company. Their role is generally to provide independent guidance and advice to the board and to protect the interests of shareholders.

Question 9

What companies need a secretary?

Answer 9

Public

Question 10

How to remove a director ?
What resolution?
What notice?

Answer 10

Ordinary resolution
28 days special notice before removal resolution

Question 11

General duties of directors

Answer 11

Duty to act within powers (s 171 CA 2006);
Duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006);
Duty to exercise independent judgment (s 173 CA 2006);
Duty to exercise reasonable care, skill and diligence (s 174 CA 2006);
Duty to avoid conflicts of interest (s 175 CA 2006);
Duty not to accept benefits from third parties (s 176 CA 2006); and
Duty to declare any interest in a proposed transaction (s 177 CA 2006).

Question 12

Duty to promote success of the company - how to assess it?

Answer 12

For the benefit of its members as a whole
Success = long-term increase in value

Question 13

How to protect directors from breaching duty to promote the success of the company?

Answer 13

Clearly note board minutes

Question 14

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

Answer 14

The required level is the level of skill, care and diligence which would be exercised by a reasonably diligent person with:
the general knowledge, skill and experience that may reasonably be expected of someone in their role; and
the general knowledge, skill and experience of that director.

The minimum standard expected of a director is that objectively expected of a director in that position. This standard may then be subjectively raised if the particular director has any special knowledge, skill and experience

Question 15

When does duty to avoid conflict is not infringed?

Answer 15

The duty is not infringed ‘if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest’ or if the conflict arises:
in relation to a transaction with the company (eg a transaction between the director and the company); or
in relation to a matter which has been authorised by the directors

Question 16

Duty not to accept benefits from 3rd parties - when is it infringed and when is it not

Answer 16

a director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing (or not doing) anything as a director.
duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest
the other directors cannot authorise an arrangement under this section

Question 17

Duty to declare interest in a proposed transaction
What must they declare?
To whom must they declare?
Does the director have to be party to the transaction for this section to apply?

Answer 17

Any director who is interested in a proposed and existing transaction with the company must declare the nature and extent of their interest to the other directors (direct and indirect interest) at BM or normal notice

The director does not have to be party to the transaction for s 177 CA 2006 to apply

Question 18

When does a director need not make a declaration of conflict of interest?

Answer 18

the director is not aware of the interest or transaction or arrangement in question (a director is treated as being aware of the interest or transaction/arrangement if it is a matter of which they ought reasonably to have been aware);
the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about the conflict of interest; or
if the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board, or a committee of the board, of directors.

Question 19

Can a director vote and count in the quorum at BM if they are interested in a proposed transaction?

Answer 19

NO (unless this provision is disapplied by ordinary resolution or the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest)

Question 20

What resolution is needed to rectify a breach of directors duties?

Answer 20

Ordinary

Question 21

What resolution is needed to approve a director’s long-term service contract?

Answer 21

Ordinary resolution

Question 22

What is a long-term service contract?

Answer 22

a period during which the contract is to continue other than at the instance of the company (ie a contractual term of more than two years or where the director is in control of how long the contract continues); and
during this time the company either cannot terminate the contract or can only terminate in specific circumstances
OR the period of notice to be given by the company

Question 23

Who approves the long-term service contract if the director is also a director of any holding company?

Answer 23

Shareholders of the holding company and the subsidiary company

Question 24

What are consequences of non-compliance with requirement for approval of director’s long-term service contracts?

Answer 24

The provision in contravention will be void
The contract will be deemed to contain a term entitling the company to terminate it at ant time by giving of reasonable notice

Question 25

Who approves the director's long-term service contract is the company is a wholly-owned subsidiary?

Answer 25

approval is not required by the members of any company which is a wholly owned subsidiary of another company.

Question 26

Does a director need to disclose their interest in their long-term service contract? + can they vote and count in the quorum?

Answer 26

NO and NO

Question 27

When must a memorandum setting out the proposed long-term service contract be available for inspection?

Answer 27

At least 15 days ending with the date of the meeting At the meeting itself

Question 28

What is the notice period of a GM at which the long-term service contract will be voted on ?

Answer 28

15 days (unless written resolution is used)

Question 29

How is memorandum sent if the written resolution procedure is used for approving directors long-term service contract?

Answer 29

memorandum must be send before or at the time the proposed resolution is sent

Question 30

What resolution is needed to approve a substantial property transaction?

Answer 30

Ordinary resolution

Question 31

What is a substantial property transaction?

Answer 31

acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company

Question 32

What is a substantial non-cash asset for the purpose of substantial property transaction?

Answer 32

An asset worth more than £100,000 is a substantial asset. An asset worth more than £5,000, but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company’s net asset value.

Question 33

What are connected persons for the purpose of substantial property transaction?

Answer 33

Members of the director's family: spouse or civil partner, parents, children or step-children Note that brothers, sisters, grandparents, grandchildren, uncles and aunts are NOT connected persons under CA 2006. Bodies corporate ie companies in which the director (and others connected with them) holds 20% or more of the shares A business partner of the director or those connected with them. Trustees of a trust the beneficiaries of which include the director or those connected with them

Question 34

Who needs to approve a substantial property transaction involving a director of a holding company? + what's the exception?

Answer 34

if the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by ordinary resolution Exception: wholly-owned subsidiary

Question 35

Substantial property transaction with no shareholders approval -> consequences

Answer 35

Transaction is voidable and directors personally liable to account to the company for its profits

Question 36

What is a defence for the director and their connected person if they entered a substantial property transaction without approval?

Answer 36

Director took all reasonable steps to ensure the company’s compliance - NOT liable Connected person can show they had no knowledge of the circumstances constituting contravention

Question 37

Does a director need to disclose its interest in a substantial property transaction?

Answer 37

Disclose nature and extent of interest to the board need not formally to declare an interest if the other directors are already aware of it.

Question 38

What resolution is needed to approve a loan to a director?

Answer 38

Ordinary resolution

Question 39

Provision on loans to directors applies to...

Answer 39

Loans - company lends money to a director Quasi-loans - where a company agreed to pay off an outstanding account owed by a director to a third party on the understanding that the director would later reimburse the company Credit transactions - where the company provides goods or services on a credit basis which will be paid for at a later date. Only the company and the director will be parties to this arrangement Guarantees or provision of security - where a director obtains a loan from a bank and their company stands as guarantor for the repayment of the loan or the company provides the bank with security over its assets

Question 40

What companies are associated for the purpose of loans?

Answer 40

companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate

Question 41

What is the prohibition on loans, guarantees or security to directors? To whom does it apply?

Answer 41

No company may make loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors, without the transaction first being approved by the shareholders by ordinary resolution. Applies to all companies

Question 42

What is the prohibition on quasi loans and credit transactions ? To whom does it apply?

Answer 42

Loans to a person connected to a director of the company or a director of its holding company Quasi-loans (s 198) to, or credit transactions (s 201) with their directors and directors of a holding company or persons connected with such directors Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors Applies to public companies and private companies associated with public companies

Question 43

What is the exception to the requirement of shareholder approval of a loan to a director?

Answer 43

Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval

Question 44

Loan given to a director without approval -> consequences

Answer 44

Agreement is voidable + director personally liable

Question 45

Loan with a director without approval -> defences for the director and connected person

Answer 45

Arrangement with a person connected with a director - director will not be liable if they took all reasonable steps to ensure the company complied The connected person and director who authorised the transaction - can show they have no knowledge of circumstances constituting the contravention

Question 46

Who approves if the loan is with a director of the holding company?

Answer 46

if the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR

Question 47

Who approves the loan to a director if its a wholly owned subsidiary?

Answer 47

approval is not required by the members of any company which is a wholly-owned subsidiary of another company

Question 48

Do directors need to disclose their interest in loans made to them? + can be vote and count in quorum

Answer 48

YES Director must disclose nature and extent of their interest to the board need not formally declare an interest if the other directors are already aware of it Director cannot count in the quorum for board resolution or vote on the arrangement

Question 49

For a loan to a director when must memorandum of the proposed loan be available?

Answer 49

a) at the company’s registered office for not less than 15 days ending with the date of the meeting; and b) at the meeting itself.

Question 50

What is he notice of GM to approve a loan to a director?

Answer 50

15 days notice (unless written resolution is used)