Directors

Question 1

A company has taken advice from an insolvency practitioner who is a qualified accountant about the financial position. Everybody on the board agrees with the advice and unanimously vote to follow it. The insolvency practitioner knows one of the directors socially.
Which one of the following statements reflects the insolvency practitioner’s position within the company?

(a) 
It is likely that the insolvency practitioner will be considered a shadow director as the board is unanimously following their advice.

(b) 
The insolvency practitioner is unlikely to be considered a shadow director.

(c) 
It is likely that the insolvency practitioner will be considered a non-executive director.

(d) 
It is likely that the insolvency practitioner will in effect be an alternate director.

(e) 
It is likely that the insolvency practitioner will be considered a shadow director as they have a social connection to one of the directors.

Answer 1

(b) 
The insolvency practitioner is unlikely to be considered a shadow director.


Question 2

A company which imports fine wines has been taking advice from the brother of one of the directors, who owns a vineyard in the South of France. The brother has been involved in the company’s business since its inception three years ago and has given advice both on sourcing the best wines but also on marketing and branding. Everybody on the board agrees with the advice and always unanimously votes to follow it.
Which one of the following statements reflects the brother’s position within the company?

(a) 
It is likely that the brother will be considered to be an alternate director.

(b) 
It is likely that the brother will be considered a non-executive director of the company.

(c) 
It is unlikely that the brother will be considered a shadow director as he has not been appointed as a director of the company.

(d) 
It is likely that the brother will be considered to be a de jure director.

(e) 
The brother is likely to be considered a shadow director.


Answer 2

(e) 
The brother is likely to be considered a shadow director.


Question 3

Which one of the following statements is correct in relation to the requirements for directors and a company secretary for public and private companies?

(a) 
A private limited company must have a minimum of one director. A secretary is not required. A public limited company must have a minimum of two directors and a company secretary.

(b) 
A private limited company must have a minimum of one director. A secretary is not required. A public limited company must have a minimum of one director and a company secretary.

(c) 
A private limited company must have a minimum of one director. A public limited company must have a minimum of two directors. A secretary is not required for any type of company, but most public limited companies do have company secretaries.

(d) 
A private limited company must have a minimum of two directors. A secretary is not required. A public limited company must have a minimum of two directors and a company secretary.

(e) 
A private limited company must have a minimum of one director and a company secretary. A public limited company must have a minimum of two directors and a company secretary.

Answer 3

(a) 
A private limited company must have a minimum of one director. A secretary is not required. A public limited company must have a minimum of two directors and a company secretary.


Question 4

True or false: if a private company does not have a company secretary, a shareholder will undertake the administrative duties the secretary would be liable for.

Answer 4

False: if there is company secretary, a director undertakes those duties.

Question 5

Which types of directors can act as directors when they are not in fact validly appointed as such?

Answer 5

1. De facto directors
2. Shadow directors
3. Alternate directors

Question 6

True or false: de jure directors may be executive or non-executive.

Answer 6

True

Question 7

ABC Ltd has just appointed a director to the Board by a board resolution. The new director will be an employee of the company in the position of finance director and has been given a 1 year service contract in the first instance.
Which of the following statements is correct regarding the information that the company must disclose in relation to the new appointment?

(a) 
Because their service is only for one year, the company is under no obligation to inform Companies House of the director’s appointment. The directors’ service contract must be kept for inspection at the company’s registered office.

(b) 
The company must file form AP01 at Companies House in relation to the director’s appointment. The new director will have to provide their personal address for public inspection.

(c) 
The company must file form AP01 at Companies House in relation to the director’s appointment. The directors’ service contract must be kept for inspection at the company’s registered office.

(d) 
The company must file form AP01 at Companies House in relation to the director’s appointment. The director’s service contract must also be filed at Companies House.

(e) 
The company must file form AP01 at Companies House in relation to the director’s appointment. Because the service contract is for one year only, it will not need to be kept for inspection.

Answer 7

(c) 
The company must file form AP01 at Companies House in relation to the director’s appointment. The directors’ service contract must be kept for inspection at the company’s registered office.


Question 8

Which of the following statements correctly lists all the details concerning directors that must be included in the company’s annual accounts?

(a) 
Information concerning directors’ salaries and bonus payments and any compensation paid to directors and past directors for loss of office.

(b) 
Information concerning directors’ salaries, bonus payments and pension entitlements.

(c) 
Information concerning any compensation paid to directors and past directors for loss of office.

(d) 
Information concerning directors’ salaries, bonus payments and pension entitlements and any compensation paid to directors and past directors for loss of office.

Answer 8

(d) 
Information concerning directors’ salaries, bonus payments and pension entitlements and any compensation paid to directors and past directors for loss of office.

Question 9

XYZ Ltd is a small private company with three directors who are all shareholders in the company. There is a fourth shareholder who is not a director. XYZ Ltd has unamended model articles.
XYZ Ltd wants to appoint a new director to the board. Which of the following statements represents the best advice to the company?

(a) 
The appointment of the director has to be approved by a special resolution of the shareholders.

(b) 
The directors can appoint the new director to the board with a board resolution.

(c) 
The directors can appoint the new director to the board with a unanimous decision.

(d) 
It is not possible for the directors to appoint another director because there is a fourth shareholder who is not a director.

(e) 
The appointment of the director has to be approved by an ordinary resolution of the shareholders.


Answer 9

(b) 
The directors can appoint the new director to the board with a board resolution.


Question 10

Under which circumstances is a director automatically removed?

Answer 10

1. Director becomes disqualified
2. Director becomes the subject of an individual voluntary arrangement
3. Director becomes bankrupt
4. Registered medical practitioner states in writing to the company that the director is physically or mentally incapable of acting as director

Question 10

How many days notice does do the shareholders have to give to pass ordinary resolution for the removal of a director from office?

Answer 10

Special notice of 28 clear days

Question 11

True or false: all companies have to enact retirement by rotation under CA and MAs

Answer 11

False: only public companies are required to rotate and reappoint directors by their members

Question 12

How often do public companies have to rotate directors under CA and MAs?

Answer 12

Every three years

Question 13

What is the procedure to follow after a director has been removed or has terminated his service as director?

Answer 13

The company must update their internal register and file form TM01 to the Companies House

Question 14

A company is proposing to build a sewage plant in a small town in the south of England. This sewage plant will lead to a massive increase in profit for the company and boost employment in the area.
Which of the following statements best describes the directors’ duty under s 172 CA 2006?

(a) 
If the decision promotes the short term profits of the company, the directors can still proceed with the decision.

(b) As long as the minutes reflect the fact that s 172 CA 2006 has been considered the directors will not be in breach of their duty.

(c) 
It will be impossible for the directors to comply with s 172 and build the sewage plant because the environmental considerations will outweigh the duty to promote the success of the company.

(d) 
One of the factors for the directors to consider in deciding whether to go ahead with the proposal will be the environmental impact of the plant.

(e) 
The boost in employment cannot be a factor.

Answer 14

(d) 
One of the factors for the directors to consider in deciding whether to go ahead with the proposal will be the environmental impact of the plant.


Question 15

Which of the following statements correctly describes the duty of directors under s 171 CA 2006?

(a) 
Directors must act within the company’s constitution and must exercise reasonable skill and care.

(b) 
Directors must promote the success of the company.

(c) 
Directors must act within the company’s constitution and must exercise their powers for the purposes for which they are conferred.

(d) 
Directors must exercise their powers for the purposes for which they are conferred and must exercise reasonable skill and care.

(e) 
Directors must act within the company’s constitution and must exercise independent judgment.

Answer 15

(c) 
Directors must act within the company’s constitution and must exercise their powers for the purposes for which they are conferred.


Question 16

To whom do directors owe their duties under s 171 – 177 CA 2006?

(a) 
The shareholders.

(b) 
The company.

(c) The creditors of the company.

(d) 
The shareholders and the creditors.

(e) 
The company and the shareholders.

Answer 16

(b) 
The company.


Question 17

One shareholder of XYX Ltd thinks that the financial director has breached their duty to the company under s 174 CA 2006 of exercising their reasonable care skill and diligence by not properly conducting due diligence on a recent large purchase of land which has cost the company thousands of pounds.
Which of the following statements is correct about the remedies for this breach if it is found to be a breach?

(a) 
The shareholder will be entitled to claim any remedy for breach of fiduciary duty.

(b) 
The company will likely be entitled to damages for the breach.

(c) 
The shareholder will likely be entitled to damages for the breach.

(d) 
A breach of s 174 CA 2006 is not actionable by either the company of the shareholder.

(e) 
The Company will likely be entitled to an order setting aside the transaction.

Answer 17

(b) 
The company will likely be entitled to damages for the breach.


Question 18

ABC Ltd wants to enter into a contract with DEF Ltd for DEF Ltd to supply it with £200,000 of office furniture. One of ABC Ltd’s directors holds 25% of the shares in DEF Ltd. ABC Ltd has unamended model articles.
Which of the following statements represents the best advice to the director with regard to their directors’ duties under the CA 2006?

(a) 
The director must declare their interest in the proposed transaction in writing.

(b) 
The director should declare their interest in the proposed transaction to the board of ABC Ltd at the earliest opportunity and before the transaction is interested into.

(c) 
The director should declare their interest in the proposed transaction to the board of DEF Ltd at the earliest opportunity and before the transaction is interested into.

(d) 
As long as the director declares their interest, they will be able to vote on the transaction.

(e) Section 175 CA applies to the conflict and the director needs to avoid this conflict.

Answer 18

(b) 
The director should declare their interest in the proposed transaction to the board of ABC Ltd at the earliest opportunity and before the transaction is interested into.


Question 19

In which one of the following situations would a director NOT need to declare their interest under s 177 CA 2006?

(a) 
Where the board is voting on a transaction with another company in which the director has a small (5%) shareholding.

(b) 
Where the board is voting on the purchase of equipment worth £2,000 from the director’s father.

(c) 
Where the board is voting on the terms of the director’s service contract.
(d) 
Where the board is considering the purchase of a property worth £300,000 from the sister of one of the directors.


Answer 19

(c) 
Where the board is voting on the terms of the director’s service contract.

Explanation: it is an exception under s 177(6)(c)
 CA

Question 20

When does a director not have to make a declaration under s. 177?

Answer 20

1. Where director is not aware of interest/transaction/arrangement in question (reasonable basis)
2. Interest cannot reasonably be regarded as likely to give rise to conflict of interest or other directors know/ought to have known about conflict
3. If conflict arises bc it concerns their service contract and contract has been/will be considered by Board or committee of Board of directors

Question 21

True or false: breaches of directors under duties in s. 171-3 and 175-7 are enforceable as fiduciary duties owed by directors to the company.

Answer 21

True

Question 22

How can shareholders ratify conduct of director?

Answer 22

Ordinary resolution following conduct of directors in:
1. Negligence
2. Default
3. Breach of duty
4. Breach of trust

Question 23

True or false: where director holds shares in the company, any votes to ratify breach which is attached to those shares held by them or any person connected to them will be disregarded.

Answer 23

True under s. 239(4) CA

Question 24

Where are shareholders unable to ratify directors’ acts?

Answer 24

1. If acts are unlawful
2. If it is a breach of fiduciary duty in insolvency - in insolvency, directors owe duties to creditors, not the company.

Question 25

What is the minimum level of reasonable skill, care and diligence required from directors under s. 174?

Answer 25

That objectively expected of a director in that position.

Question 26

What is enlightened shareholder value?

Answer 26

Middle-way between running company purely to maximise interests/profits and pluralist approach which involves acting in interests of wider group of stakeholders.

Question 27

What is the list of factors under s. 172 duty to promote success of co?

Answer 27

1. Likely consequences of any decision in long-term
2. Interests of co’s employees
3. Need to foster co’s business relationship with suppliers and customers
4. Impact of co’s operations on community and environment
5. Desirability of co maintaining reputation for high standards of business conduct
6. Need to act fairly as between members of co

Question 28

A company wants to renew one of its directors’ service contracts. The company has one shareholder, which is its parent company.
The draft contract is for an initial period of two years. The director has the option to extend the contract for a further year, provided they give notice to the company six months before the expiry of the initial period. The company does not have the same right to renew. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.
Which of the following statements is correct in respect of the need for shareholder approval of this contract?

(a) 
The shareholders of the parent company will need to give permission because they are the ultimate owners of the group.

(b) Shareholder approval will be required by ordinary resolution because this contract fits within the definition of a guaranteed term of more than 2 years.

(c) 
The quickest the shareholder approval can be obtained is 15 days.

(d) 
The company is a wholly owned subsidiary so is exempt from obtaining approval.

(e) 
The company is renewing the service contract as the director is already employed, so no shareholder approval is necessary.

Answer 28

(d) 
The company is a wholly owned subsidiary so is exempt from obtaining approval.


Question 29

Which one of the following service contracts falls within the definition of a long-term service contract under s 188?

(a) 
A contract with an initial term of 18 months, where the director has an option to extend the contract for a further year, provided they give notice to the company six months before the expiry of the initial period. The company does not have the same right to renew. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.

(b) 
A contract with a fixed term of two years. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.

(c) 
A contract with a fixed term of three years. During the period of the agreement the company can terminate the employment on six months’ notice.

Answer 29

(a) 
A contract with an initial term of 18 months, where the director has an option to extend the contract for a further year, provided they give notice to the company six months before the expiry of the initial period. The company does not have the same right to renew. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.


Question 30

A company wants to renew one of its director’s service contracts. The company has three shareholders, all of whom are also directors.
The draft contract is for an initial period of 18 months. The director has the option to extend the contract for a further year, provided they give notice to the company six months before the expiry of the initial period. The company does not have the same right to renew. During the period of the agreement the company can only terminate the employment if the director breaches the disciplinary policy.
Which of the following statements is correct in respect of the need for shareholder approval of this contract?

(a) 
Shareholder approval will be required by ordinary resolution because this contract fits within the definition of a guaranteed term of more than two years.

(b) 
This contract does not fall into the definition of a long-term service contract since the guaranteed term is not over two years, therefore no shareholder approval is necessary.

(c) 
Since all of the shareholders of this company are also directors, no shareholder approval is necessary.

(d) 
If shareholder approval is necessary, the quickest it could be obtained is 15 days.

(e) 
The company is renewing the service contract as the director is already employed, so no shareholder approval is necessary.

Answer 30

(a) 
Shareholder approval will be required by ordinary resolution because this contract fits within the definition of a guaranteed term of more than two years.


Question 31

How long must the company keep directors’ service contracts under s. 228 CA?

Answer 31

For period of at least one year during and from date of termination or expiry of contract for members to inspect?

Question 32

True or false: s. 288 for members’ rights to inspect directors’ service contract only applies to contracts for a period of 12 months or longer.

Answer 32

False, s. 288 replies regardless of length of contract.

Question 33

True or false: if written resolution procedure is followed for memorandum for approval of director’s service contract, 15 days notice minimum must be given.

Answer 33

False: 15 days notice must be given if ordinary resolution at GM - no 15-day requirement for written resolution.

Question 34

ABC Ltd is proposing to buy a piece of land from the aunt of one of its directors. ABC Ltd has three shareholders including the director.
The land has been independently valued at £150,000 and all parties are happy with this valuation. The net asset value of ABC Ltd is £3.5 million.
Is the approval of the shareholders of ABC Ltd required for this transaction?

(a) 
Shareholder approval is required because the company is buying an asset from a person connected to a director.

(b) 
Shareholder approval is not required and therefore the director has no conflict of interest.

(c) 
The director will be precluded from voting at the General Meeting when the loan comes to be voted on because of MA 14.

(d) 
The asset is not substantial in value because it is not more than 10% of the net asset value of the ABC Ltd.

(e) 
Shareholder approval is not required because “aunt” is not a person connected to a director and therefore the acquisition does not fall within the legislation.

Answer 34

(e) 
Shareholder approval is not required because “aunt” is not a person connected to a director and therefore the acquisition does not fall within the legislation.

Question 35

Company A has four shareholders, all of whom are also directors. The net asset value of Company A is £700,000.
Which one of the following transactions falls within the statutory provisions on substantial property transactions and will require shareholder approval from the shareholders of Company A by way of ordinary resolution?

(a) 
The purchase of some land worth £110,000 by Company A from the brother of one its directors.

(b) 
The purchase of some machinery worth £80,000 from the uncle of one of its directors.

(c) 
The disposal of some equipment worth £75,000 by Company A to another company in which one of Company’s A’s directors has a 25% shareholding.

(d) 
The sale of some equipment worth £70,000 from Company A to one of its directors.

Answer 35

(c) 
The disposal of some equipment worth £75,000 by Company A to another company in which one of Company’s A’s directors has a 25% shareholding.


Question 36

ABC Ltd is proposing to buy some equipment from the father of one of its directors. ABC Ltd has a single shareholder, which is DEF Ltd. The director in question is also a director of DEF Ltd.
The equipment has been independently valued at £110,000. The net asset value of ABC Ltd is £2 million.
Which one of the following statements is correct regarding the need for shareholder approval for this transaction?

(a) 
Shareholder approval by ordinary resolution will be required from the shareholders of both ABC Ltd and DEF Ltd.

(b) 
Shareholder approval is not required because “father” is not a person connected to a director and therefore the acquisition does not fall within the legislation.

(c) 
No shareholder approval is required, since value of the transaction is less than 10% of the company’s net asset value.

(d) 
Shareholder approval by ordinary resolution will be required from the shareholders of DEF Ltd only.

(e) 
Shareholder approval by ordinary resolution will be required from the shareholders of ABC Ltd only.

Answer 36

(d) 
Shareholder approval by ordinary resolution will be required from the shareholders of DEF Ltd only.


Question 37

Where substantial property transaction has been entered into without shareholder approval, transaction is voidable at instance of co unless …

Answer 37

1. Restitution is no longer possible
2. Co has been indemnified for loss/damage suffered by it
3. Rights acquired in good faith by TP would be affected by the avoidance

Question 38

Which relatives are not usually considered connected persons?

Answer 38

1. Brothers
2. Sisters
3. Grandparents
4. Grandchildren
5. Uncles
6. Aunts

Question 39

What is a substantial asset?

Answer 39

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

Question 40

When must shareholder approval by ordinary resolution for a substantial property transaction be given?

Answer 40

Must be given either before transaction is entered into, or after, provided that transaction is made conditional on approval being obtained

Question 41

Parent Plc owns 100% of the shares in Subsidiary Ltd. It is proposed that Subsidiary Ltd will lend the wife of one of Parent Plc’s directors £35,000 to start up a business.
Which of the following statements is correct in respect of the proposed loan?

(a) 
The loan falls within the exceptions because it is under £50,000 and therefore no shareholder approval is needed.

(b) The loan does not fall within the relevant legislation because a wife of a director of a holding company does not fall within the definition of person connected to a director.

(c) Neither Parent Plc nor Subsidiary Ltd will need to obtain approval from their shareholders.

(d) 
Shareholder approval will be required from Parent Plc but not Subsidiary Ltd.

(e) 
Shareholder approval will be required from both Parent Plc and Subsidiary Ltd.

Answer 41

(d) 
Shareholder approval will be required from Parent Plc but not Subsidiary Ltd.


Question 42

ABC Ltd has two directors and four shareholders (who are the directors plus two other relatives of the directors). It has no subsidiaries.
For which one of the following transactions will ABC Ltd need shareholder approval by way of ordinary resolution?

(a) 
ABC Ltd wishes to provide a guarantee for a bank loan for £15,000 to one of its directors.

(b) 
ABC Ltd wishes to lend £20,000 to the husband of one of its directors.

(c) 
ABC Ltd wishes to pay £35,000 for renovations on the home of one of its directors, on the basis that the director will repay the money over a two-year period.

(d) 
ABC Ltd wishes to lend one of its directors £8,000 in order to pay for a training course.

(e) ABC Ltd wishes to purchase a season travel ticket for one of its directors at a cost of £12,000. The director will repay the money in instalments on a salary sacrifice basis.


Answer 42

(a) 
ABC Ltd wishes to provide a guarantee for a bank loan for £15,000 to one of its directors.


Question 43

ABC Ltd has three directors and three shareholders (who are the three directors). It has no subsidiaries. ABC Ltd wishes to lend £50,000 to one of its directors. All of the directors and shareholders are in agreement that the loan should be made and that none of the directors will be breaching any of their general duties in providing the loan.
ABC Ltd seeks your advice as to the procedure to be followed in order that the loan may be provided as quickly as possible. Which of the following is the best advice?

(a) 
Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and display this at the registered office. Since all the shareholders are in agreement, a general meeting may be held on short notice for the ordinary resolution to be passed.

(b) 
Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and display this at the registered office. The general meeting must be held on full notice for the ordinary resolution to be passed, due to the requirement for the memorandum to be displayed for 15 days ending with the date of the GM.

(c) 
Since the shareholders and directors are the same persons, no shareholder approval will be required for the loan. The board of ABC Ltd can pass a board resolution to approve the loan instead.

(d) 
Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and submit this to the shareholders together with a written resolution to approve the loan. The ordinary resolution will be passed as soon as over 50% of the shareholders sign the written resolution.


Answer 43

(d) 
Shareholder approval by ordinary resolution will be required. ABC Ltd should prepare a memorandum setting out the terms of the proposed transaction and submit this to the shareholders together with a written resolution to approve the loan. The ordinary resolution will be passed as soon as over 50% of the shareholders sign the written resolution.


Explanation: Shareholder approval will be required since this is a loan to one of the company’s directors and it does not fall within any of the exceptions. Since ABC Ltd wishes to provide the loan as quickly as possible, a written resolution should be used to avoid the 15-day notice requirement for the memorandum.

Question 44

What are the exceptions to loans to directors or connected persons which need shareholder approval?

Answer 44

1. Expenditure of company business up to maximum of £50,000
2. Loans for defending proceedings brought against director
3. Loans for defending regulatory actions/investigations
4. Minor business transactions
   (a) Loans/quasi-loans up to £10,000
   (b) Credit transactions up to £15,000
5. Intra group transactions and
6. Money lending companies - loan made in ordinary course of business

Question 45

What does associated mean in the context of companies?

Answer 45

Companies who are associated: if one is subsidiary of company of another or both are subsidiaries of the same body corporate