Directors

Question 1

Who can be director?

Answer 1

1. each company must have at least 1 director, public must have 2
2. Each must have 1 natural director (age 16 and above)
3. If one or more is a corporate director, a corporate representative will attend board meeting to discharge functions as a director
4. A person cannot take office as director if they are *disqualified *
5. A person ceased to be a director if
   a bankruptcy order has been made or doctor has given opinion that they have become physically or mentally incapable of acting as director and may remain so for more than three months.

Question 2

Type of director

Answer 2

1.executive: being appointed to board and also have an employment contract. Directos’ employement contracts are service contracts/agreements.
2.non executive: appointed to the board but will have no employment contract. They do not receive salary but receive directors’ fee for attending board meetings. Common in public companies (stimes required by law)

Question 3

Chairperson

Answer 3

1. Appointed by board by board resolution
2. have casting vote
3. Chair of public company has more important role: act as figurehead in dealings with shareholders

Question 4

De factor directors and shadow directors

Answer 4

1. De factor directors will generally be carrying out the job of director even though they are not officially appointed
2. **Shadow directors ** are not carrying out functions of director and not formally appointed but they have great deal of influence and control over other directors actions

Question 5

Appointment of directors

Answer 5

1. in accordance with AoA
2. MA: director can be appointed by board or by ordinary resolution of shareholders
3. Company must notify CH with 14 days of appointment, register on register of directors and register of directors’ residential addresses

Question 6

Shareholder/director divide

Answer 6

When an individual is both a shareholder and a director:
1. In board meeting, they must act as director and promote success of company without thinking of personal interests
2. in GM, they can act as shareholders and vote to promote their interests.

Question 7

Directors’ actual and apparent authority

Answer 7

1. Actual authority: arises where director has consent from other directors expressly (in service contract, or discussion) or impliedly (director has acted previously in the past but the board has not tried to stop)
2. Apparent authority: director acts without company’s prior consent but still binds the company. (recent case law: in absense of information from company to correct that information)

Question 8

Directors service contracts

Answer 8

1. Board of directors can decide on the terms of a directors’ service contract under their general power to run company adn decide on directors remuneration
2. Exception: a service contract with **a guaranteed term of more than 2 years **must be approved by shareholders by ordinary resolution.
   a. Note: e.g. service contract for 10 years with notice period of less than 2 year does not need to approved by shareholders).
   b. When proposes an ordinary resolution, board must keep a copy of memo setting out terms of proposed service contracts at registered office for 15days prior to the meeting/if resolution is proposed by written resolution, a copy of memo must be circulated to shareholders with the written resolution.
   c. any such contract without approval of shareholders, the guaranteed term will be void, but the rest will be enforceable. The service contract would be capable of termination on reasonable notice.
3. Director service agreement (or memo) must be avalable for inspection by sharholders without charge and within 7 days of request during the term and until 1 year after termination of the service contract.

Question 9

Removal of directors

Answer 9

1. Shareholders can remove by ordinary resolution
2. A special notice is required for a resolution to remove a director: notice of intention to pass a resolution has been given to company at leaset 28 days befor GM at which resolution is proposed.
3. Company must inform director in question at the same time it gives notice of GM or if it is not practicable, at least 14 days beforeGM, by advertisement in an appropriate newspaper, or any other manner under AoA. Director can speak at GM and require the company to send representation to shareholders.

Question 10

Special provisions in AoA or shareholder’s agreement

Answer 10

1. Bushell v Faith: clause give sb both shareholder and director greater voting right as a shareholder if the resolution in question is a resoluion to remove such person as director.
2. Clause obliging shareholders to vote against removal of fellow shareholders from their office as director

Question 11

Notification requirements

Answer 11

1. Keep register of directors
2. register of directors residential addresses
3. notify a change in particulars for natural persons and corporate directors
4. Notify the appointment, resignation and removal of a director

Question 12

Directors’ duties

Answer 12

1. Duty to act within powers
2. Duty to promote the success of the company
3. Duty to exercise independent judgement
4. Duty to exercise reasonable care, skill and diligence
5. Duty to avoid conflict of interests
6. Duty not accept benefits from 3rd parties
7. Duty to declare interest in a proposed transaction

Question 13

Why is it difficult to prove breach of duty to promote success of company?

Answer 13

Factors to be considered:
1. consequence in long term
2. interest of employees
3. need to foster company business, relationship with suppliers, customers
4. impact on community and environment
5. desirability of company maintaining a reputation for high standard
6. need to act fairly between members of company.

Because court will apply a subjective test, it is extremely difficult to establish a breach. As long as court is satisfied that director acted in good faith and considered all the above factors, the director will not be in breach.

Question 14

Duty to avoid conflict of interest

Answer 14

1. situations in which directors have or can have direct or indirect conflict of interest
2. applies in particular to exploitation of any property, information and opportunity
3. It is immaterial whether the company reject such opportunity
4. only relate to contract which company is not involved/not in a transaction with company.
5. duty is not infringed if the matter has been authorised by the directors.

Question 15

Exceptions to the duty to declare (only applicable to transaction with the company)

Answer 15

1. director is not and not ought reasonably aware of the interest
2. interest cannot reasonably be regarded as likely to give rise to conflict of interest
3. other directors are (ought to reasonably) award of the interest
4. if it concerns directors service contract

Question 16

Civil consequences of breach of directors duties

Answer 16

Consequences for most fiduciary duties are equitable remedies:
2. 1. account for profit
2. equitable compensation
3. rescission of any contract entered as direct or indirect result of the breach
4. injunction
5. restoration of property transferred as result of breach

Breach for duty to exercise reasonable care is common law damages (same as damages for negligence)

Question 17

Ratification of breach

Answer 17

Shareholders can ratify a breach or potential breach of a director’s duty by ordinary resolution. (the director (being also a shareholder) can not propose a written resolution/cannot vote in the GM)

Question 18

Duty to declare of interest in existing transaction or arrangement

Answer 18

E.g. director appointed, 2 months before, company entered a contract with her interest, she must declare.

Failure to declare interest in existing is criminal offense subject to a fine. vs declare interest in proposed transaction is a civil matter.

Question 19

Claims against directors of insolvent companies

Answer 19

1. Wrongful trading
2. Fraudulent trading
3. Misfeasance

Question 20

What would constitute wrongful trading?

Answer 20

often brought by liquidator or administrator If:
1. Company has gone into insolvent liquidation or administration
2. Before commencement of winding up, director knew or ought to have concluded there was no reasonable prospect that company can avoide insolvent liquidation
3. that person was director atthe time.

Remedy: court may order the director to make a contribution to the company’s assets, increasing the amount of money payable to creditors.

Question 21

Defense for wrongful trading

Answer 21

Director will not be liable for wrongful trading if they took every step with a view to minimising potential loss to creditor (what they ought to have known, conclusion they ought to have reached and steps that they ought to have taken).

Standards test that a reasonably diligent person having both:
- general knowledge skill and experience to carried out the function of director: objective test
- general knowledge skill and experience that such director actually has : subjective test.

Question 22

Fraudulent trading

Answer 22

• A director will be liable for fraudulent if in the course of company being wond up, it appears that the business has been carried on with intention to defraud creditors.
• To be brought by liquidator or adminsitrator.
• Difficult to be successful as it is difficult to prove element of fraud/usually also give rise to wrongdoing trading.
• Any director found liable for fraudulent trading will subject to criminal conviction.

Question 23

Misfeasance

Answer 23

1. Misfeasance is breach of any fiduciary or other duty of directors.
2. During course of winding up, directors may be ordered to:
   * contribute to the company assets by way of compensation in respect of misfeasance or
   * repay, restore or account for any money or property or any part of it has been misapplied in breach of duty.

Question 24

Controls on directors

Answer 24

1. Shareholder’s consent of:
   a. Substantial property transactions
   b. Loans to directors
   c. Long term service contract
   d. Payment for loss of office
   2.Discqualifications of directors

Question 25

What constitutes a substantial property transaction (SPT)?

Answer 25

SPT is where:
- a director or sb connected with director buy or sells to company
- a non-cash asset : any property or interest in property other than cash (loan is not included)
- of substantial value: more than GBP 100,000 or is worth more than **GBP 5,000 **and more than 10% of company’s net asset value (on company’s balance sheet)

Question 26

What is a person connected with a director?

Answer 26

1. member of directors family:
   - spouse or civil partner
   - child or stepchild
   - parents
   - person who lives an enduring relationship with director as their partner and any children of such person
2. company in which director or person connected with director (director and person connected taken together)
   - own **at least **20% **of corporate share; or
   - is entitled to exercise or control the exercise of more than 20% of voting power in general meeting

Question 27

Exceptions of SPT approval requirement

Answer 27

No ordinary resolution is required if:
1. an SPT when the company in question is wholly owned subsidiary of any other company
2. Transaction between a company and a person in his role as member of the company
3. transaction between a holding company and its wholly owned subsidiary or
4. transaction betwen 2 wholly owned subsidiaries of the same holding company.

Question 28

Effect of breach of approval of SPT

Answer 28

1. Transaction is voidable
2. The relevant directors or connected person and any other director who authorised the transaction may be ordered to account to the company any gain they have made, and indemnify the company for any loss.

Question 29

Loans to directors

Answer 29

1. Loans to director must be approved by shareholders by an ordinary resolution.
2. If the director receiving loan is also director of holding company, the holding company must also pass an ordinary resolution to approve the loan
3. Memo setting out terms ofloand must be available for inspection at company for 15 days prior to GM/or copy must be sent together with written resolution.

Question 30

Exceptions to approval requirement for loans to director

Answer 30

1. expenditure on company business of maximum of GBP 50k: cover expenditure for company or for enabling the director to perform their duties
2. expenditure on defending civil or criminal proceedings in relation to the company or associated company
3. expenditure on defending regulatory proceedings or defending himself in investigation by regulatory authority
4. minor and business transactions of no more than GBP 10k.

Question 31

Effect of breach of approval for loan to director

Answer 31

1. transaction voidable
2. lending director and director who authorised the loan are liable to account for any gain they made, are jointly and severally liable to indemnify the company for any loss

Question 32

Long term service contract

Answer 32

A service contract for guaranteed term of more than 2 years need to be authorised by shareholders by ordinary resolution.

Question 33

Payment to director for loss of office

Answer 33

1. when directorship ends, director will often receive payment: legally entited to payment or compensation for unfair dismissal.
2. Any payment of GBP200 or more other than those to which director is legally entited must be approved by shareholder by ordinary resolution.
3. This also applies to:
   a. Payment to past directors
   b. Payment to a person connected with director
   c. payment to any person at the direction of, or for benefit of, a director or person connected with director
4. payment includes a situation where a director is selling shares to company but the price is in excess
5. Same procedure as loan to directors
6. If company makes payment in breach, the recipient will held money on trust, and any director who authorise payment will be jointly and severally liable to indemnify the company.

Question 34

Shadow director

Answer 34

Director includes shadow director in those provisions relates to payment for loss of office, loans to directors, SPT and long term service contracts.

Question 35

Other liabilities of directors

Answer 35

1. Failure to maintain company records is offense punisable by fine. If records are accounting, director(s) can be imprisoned up to 2 years
2. Specific offence relating to failure to file certain documents to CH: e.g. failure to file special resolution is an offense punishable by fine
3. Liability for financial records: director face criminal and civil liability for breach of responsibilities for company’s account and related reports.
4. Liability for breach of health and safety legislation: imprison up to 2 years and fined up to GBP 20k.
5. Bribery: Bribery Act 2010
6. Making political donations without shareholders approval
7. Civil and criminal liability under environment laws.

Question 36

Ground for disqualification of directors

Answer 36

1.conviction of indictable offence
2.persistent breach of companies legislation
3.fraud on a winding up
4.summary conviection for failure to file a document
5.Being unfit director of an insolvent company
6.following an investigation and finding of unfitness
7.Fraudulent or wrongful trading
8.Breach of competition law

Question 37

Factors count againts andin favour of directors

Answer 37

1. Factors count against:
   a. using moeny meant to pay VAT, PAYE or insurance as company’s working capital (“trading on Crown monies”)
   b. paying excessive directors remuneration
   c.recklessly trading while insolvent
2. Factors count in favour:
   a. employing qualified financial staff
   b. taking professional advice
   c. personal financial investment in the company.
   None are conclusive on their own.

Question 38

Effect of disqualification

Answer 38

1. Director subject to disqualification order without leave of the court cannnot be a director, or in any way concerned in promotion, foundation or management of a company.
2. Leave is rarely granted
3. Contravention of disqualification order is a criminal offense and director could be fined or sentenced up to 2 years
4. A disqualified director is personally responsible for the debts of the company if they are involved in management of company while disqualified.