Directors

Question 1

Basics

How many directors must all companies have at a minimum?
What is the minimum age for a natural person director in all companies?
Do companies need to have a natural person director?

Answer 1

All companies must have at least one director (public companies must have two).
A natural person director must be at least 16 years old.
Yes, all companies must have at least one natural person director.

Sole Directors

MA 7(2): where a company only has one director, the director can validly take company decisions without calling a board meeting.

Question 2

Basics

Under MA 19, what power does the board have in relation to the directors generally?

Answer 2

The power to decide on the what services the directors undertake and their remuneration.

Question 3

Basics

What are the key features of an executive director?

Answer 3

• appointed to the board.
• has a service contract that sets out the director’s job title, duties and responsibilities.
• may have special function - e.g. finance director or managing director.

Compare to non-executive directors:
- registered at CH but no service agreement.
- no salary, but receives director’s fees to attend board meetings.

Question 4

Basics

What are the key features of the chairperson?

Answer 4

• may be appointed by board resolution.
• runs board meetings.
• only additional power: casting vote at board meetings.

Also the chair of general meetings, if willing and able.

Question 5

De facto and shadow directors

What is a de facto director and what is a shadow director?

Does the CA 2006 definition of directors include de facto and shadow directors?

Answer 5

De facto - acts as director but never validly appointed.

Shadow director - great deal of influence upon the directors, while not being formally appointed.

Frequently, yes, but it will be expressly stated in the relevant section.

Question 6

Basics

If a director cannot attend a board meeting, can they appoint an alternative director to attend/vote in accordance with their wishes?

Answer 6

Yes, but a clause to that effect must be provided in the articles (as the MAs do not provide this)

Question 7

Appointment

When do the first directors take office?
How are subsequent directors appointed?

Answer 7

On the certificate of incorporation being issued. They will be named on form IN01.

In accordance with the articles. If the Model Articles are used, the directors can be appointed by board or ordinary resolution.

Question 8

Restrictions on being a director

When does a person cease to be a director according to MA 18?

Answer 8

• a bankruptcy order is made against them;
• they become mentally or physically incapable and may remain so for more than three months, in the opinion of a doctor.

A person cannot be a director if disqualified.

Question 9

Disqualification

For how long can a director be disqualified by the court?

What are the grounds for disqualification?

Answer 9

2 - 15 years.

Disqualification

• Unfit director of an insolvent company
• Convicted of an indictable offence
• Summary conviction for failing to file a notice or document
• Persistent breaches of companies legislation
• Breach of competition law
• Fraud on winding up
• Being found unfit following an investigation
• Fraudulent or wrongful trading

Most common is the unfit director of insolvent company ground. Factors to take into account include: misfeasance, extent of failure to comply with CA 2006, extent of responsibility for preferences or transactions at undervalue.

Question 10

Disqualification

What are some factors the court considers in determining whether a director should be disqualified? (provide factors for and against the director).

Answer 10

Factors in favour of director

• employing qualified financial staff;
• taking professional advice;
• personal financial investment in the company.

Factors against director

• using money meant for VAT, PAYE or national insurance contributions as working capital (trading on Crown monies);
• excessive directors’ remuneration;
• reckless trading while insolvent.

Question 11

Disqualification

What are the effects of disqualification?

What are the consequences of contravening disqualification?

Answer 11

• Cannot be a director or be concerned in promoting, forming or managing a company without the court’s permission (rarely granted).

Contravening disqualification
- A criminal conviction that could give rise to a fine or sentence to up to two years in prison.
- The director is personally responsible for the company’s debts if they are involved in the company’s management while disqualified.

• Leave may be granted if director was not dishonest, business is profitable, other directors could provide check on activities of director.

Question 12

Administrative Requirements

When must Companies House be notified of a director’s appointment and on what form?

What other administrative requirement is there?

Answer 12

Within 14 days of the new appointment. Form AP01 (individual director) or AP02 (corporate director).

Must enter director on register of directors and register of directors’ residential addresses.

Question 13

Shareholder and Director divide

When attending general meetings, can directors promote their own interests?

Answer 13

Yes, in their capacity as shareholder.

Question 14

Director’s authority

What type of authority may a director have to bind the company into contracts?

Answer 14

Actual or apparent authority.

Question 15

Director’s authority

What are the two types of actual authority?

Answer 15

Express or, implied authority.

Implied: e.g. not expressly permitted, but acted in that way in the past and board has not tried to stop the director doing so.

Question 16

Director’s authority

When does a director have apparent authority?

Without actual or apparent authority, the director is personally liable to a third party and the company is not bound.

Answer 16

When he acts without the company’s consent, but binds company due to the company’s acts or omissions.

Effectively, the company is estopped from denying director’s authority. This is based on a representation by the company to a third party that the director is acting with authority.

Note: the company’s acts or omissions are significant in ascertaining apparent authority, not the director’s acts/omissions.

Question 17

Director’s service contracts

What are the main aspects the service contract covers?

Answer 17

• salary;
• authority of the director;
• responsibilities;
• benefits; and
• notice period.

Question 18

Director’s service contracts

When would the board’s proposal of a service contract require shareholder approval, and by what form of resolution?

If shareholder approval is not given, what is the effect?

When would shareholder approval not be required?

Answer 18

Where the board proposes a service contract with a guaranteed term of more than two years (a long-term service contract), an ordinary resolution is required to approve it.

The guaranteed element will be void, but the rest of the contract is enforceable. The contract would then be capable of termination on reasonable notice.

Where the company is given a power to terminate the service contract with notice of two years or less (even if it is for a long term).

It is the guaranteed element that requires shareholder authorisation, not length of contract

Question 19

Director’s service contracts

Suppose a company adopts the MAs and has two directors. How can the directors approve a service contract for one of them?

Answer 19

Unless otherwise given in the articles, the directors cannot automatically approve a service contract as the director in question would be precluded from counting in the quorum and voting (MA 14).

The solution is either:

• change the articles permanently by special resolution and allow voting for the particular matter of approving service contracts
• temporarily suspend MA 14 by ordinary resolution.

Question 20

Director’s service contracts

What are the admin requirements in relation to directors’ service contracts?

Answer 20

• Service contracts must be available for inspection by shareholders during the director’s term and until a year after termination
• In relation to a service contract requiring an ordinary resolution, the company must keep a copy of the memorandum setting out the proposed terms for 15 days prior to the general meeting

Shareholders have the right to inspect without charge, and within seven days of requesting.

Question 21

Ending directorship

What must the director do if they resign from directorship?

Answer 21

Complete TM01 (individual) or TM02 (corporate) within 14 days of resignation.

Note: termination of directorship is not termination of the service contract, which can only be terminated in accordance with its terms (unless the director is in repudiatory breach of the service contract and can be summarily dismissed on that basis). Likewise, termination of the service contract is not removal from office as director.

Question 22

Ending directorship: removal

What is the statutory procedure for removal by shareholders?

Answer 22

1. Special notice is given to the company 28 days before the general meeting.
2. Once received, the company informs the director in question.
3. The company gives notice of the resolution to the shareholders at the same time as it gives notice of the general meeting. If not practicable, it must give shareholders notice at least 14 days before the general meeting, by newspaper advertisement or any other manner allowed by the articles.
4. The director may speak at the general meeting and may require the company to send copies of written representations the director wishes to make.

Note: look out for special provisions in the articles or a shareholders’ agreement e.g. Bushell - Faith clauses or a clause that all parties to the agreement vote against the removal of a fellow shareholder from office

Question 23

General administrative requirements

What are some general admin requirements in relation to directors?

Answer 23

• Must keep a register of directors, available for inspection without charge by shareholders.
• Must keep register of directors’ residential addresses (not open for inspection).
• Forms CH01 and CH02 are used to notify CH of a change in directors’ particulars.
• AP01 or AP02 are used to notify CH of a director’s appointment, filed within 14 days of appointment.
  -TM01 and TM02 - resignation or removal from office. Must be filed within 14 days.

Question 24

Directors’ Duties

Who are the directors’ duties toward?

What are the directors’ fiduciary duties as codified by the CA 2006?

Which one of these is a criminal offence?

Answer 24

The company.

• act within powers (s.171)
• promote the success of the company (s.172)
• exercise independent judgement (s.173)
• exercise reasonable care, skill and diligence (s.174)
• avoid conflicts of interest (s.175)
• not to accept benefits from third parties (s.176)
• declare their interest in a proposed transaction/arrangement (s.177)
• declaration their interest inexisting transaction or arrangement (s.182)

A section 182 breach is a criminal offence.

Directors’ fiduciary duties (below) are codified by the CA 2006.

Question 25

Duty to act within powers (s.171 CA)

Set out the directors’ duties to act within their powers.

Answer 25

A director must:
- act in accordance with the constitution;
- only exercise powers for the purposes for which they are conferred.

Question 26

Duty to promote the success of the company (s.172 CA)

What are some factors the court considers in determining whether the director has breached s.172 duty?

Answer 26

• long-term consequences of any decision;
• employees’ interests;
• the need to foster business relationships;
• impact of operations on community and environment;
• reputation for high standards of business conduct;
• the need to act fairly between members.

The court applies a subjective test, so it would consider whether the director acted in good faith.

Note: extremely difficult to establish that this section was breached.

Question 27

Duty to exercise independent judgement (s.173 CA)

In what circumstance would this not be infringed?

Answer 27

Where the director acts in accordance with the constitution or an agreement by the company that restricts the director’s exercise of discretion.

Question 28

Duty to exercise reasonable care, skill and diligence (s.174 CA)

According to s.174 CA, what is the definition of reasonable care, skill and diligence?

Answer 28

that of a reasonably diligent person with

1. the knowledge, skill and experience that may reasonably be expected of a person carrying out those functions, and
2. the knowledge, skill and experience of that director.

Question 29

Duty to avoid conflicts of interest (s.175 CA)

When does the duty to avoid conflicts of interest apply in particular?

What is the major difference between this duty and the s.177 and s.182 duties?

Can the other directors authorise the breach of s.175?

A director must avoid situations in which they have a direct or indirect interest which conflicts, or possibly may conflict, with the interests of the company.

Answer 29

Where the director exploits property, information or an opportunity, whether or not the company could take advantage of the property, information or opportunity.

The duty to avoid conflict contracts in which the company is not involved.

Yes.

Sebastian is a product designer on the board of directors of the Company. The Company is approached by a client to ask if they will design a new range of kitchen equipment. The Company declines.

If Sebastian, in his personal capacity, approaches the client to carry out the works, he is in breach of his duties as he has exploited an opportunity offered to the company. If the other directors are happy for Sebastian to do this, they can authorise the breach.

Question 30

Duty not to accept benefits from third parties (s.176 CA)

When would accepting a benefit from a third party be a breach?

When would there be no breach?

Answer 30

• When the benefit is conferred by reason of being a director.
• No breach if the benefit cannot reasonably be regarded as likely to give rise to a conflict.

Example

A client offers a director corporate seats at a local football match. The client also offers a week at his holiday home and says “I know you always do what you can when it’s time to renew our contract”. The director is aware that this is an implicit signal that the director will renew the contract on favourable terms.

• Accepting the holiday home gift would be a breach.
• Corporate hospitality is unlikely to be a breach as it cannot reasonably be regarded as likely to give rise to a conflict.s

Question 31

Duty to declare interest under s.177 CA

What must be declared and how?

Answer 31

• The nature and extent of any interest in a proposed transaction with the company to the other directors.
• Can be made at a board meeting or by written notice, but there’s flexibility (does not necessarily have to be in these ways).

Question 32

Duty to declare interest under s.177 CA: Exceptions

When does a director not need to declare an interest in a proposed transaction/arrangement with the company?

Answer 32

• director is not aware of the interest (but note: a director is deemed to be aware if they ought reasonably to have been aware).
• interest cannot reasonably be regarded as likely to give rise to a conflict.
• the directors are already aware of it.
• concerns the terms of the director’s service contract.

Question 33

Duty to declare interest undert s.182

How does s.182 CA differ from s.177?

Answer 33

• relates to existing transactions/arrangements
• the declaration must be made at the board meeting or by written notice.
• Failure to comply is a criminal offence punishable by fine

Question 34

Ratification of breach

How can the shareholders ratify a breach or potential breach of the duties?

Answer 34

By ordinary resolution.

The director’s vote will not count at a general meeting, or in the case of written resolution, they will not be an eligible member.

Question 35

Civil consequences of breach of s.171-177 duties

What are the potential remedies for the company against a director in breach of a duty under s.171 - s.177?

Answer 35

• an account of profits
• equitable compensation for loss suffered by the company
• rescission of any contract entered into as a direct or indirect result of the breach
  -injunction to prevent further/continuing breach.
• restoration of property transferred as a result of breach.

For breach of the duty of reasonable care, skill and diligence (s.174 CA), the remedy is common law damages for negligence.

The exceptions are the same as s.177.

Question 36

Insolvent company claims

What are the three claims that can be made against a director of an insolvent company?

Are these civil or criminal offences?

Answer 36

• Wrongful trading;
• Fraudulent trading; and
• Misfeasance

Wrongful trading and misfeasance are civil wrongs.Fraudulent trading is a criminal offence.

Question 37

Insolvent company claims

What should you advise a director whose company is performing badly?

Answer 37

• seek professional advice (legal and financial) at first signs of problems;
• limit spending;
• check company’s accounts regularly;
• keep records of their own actions.

Question 38

Insolvent company claims: Wrongful trading

What are the conditions for a wrongful trading claim?

What would the court order?

Answer 38

• the company has gone into insolvent liquidation or insolvent administration;
• before winding up, the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation but continued to trade; and
• was a director at the time.

The court will order the director to contribute to the company’s assets.

Question 39

Insolvent company claims: Wrongful trading

What is the director’s defence to a claim of wrongful trading?

What test will be applied by the court in dealing with wrong trading claims?

Who brings a wrongful trading claim?

Answer 39

That he took every step with a view to minimising potential loss to the creditors.

Whether a reasonably diligent person would have acted in the same way with:

1. The general knowledge, skill and experience reasonably expected of a person carrying out those functions; and
2. The general knowledge, skill and experience of that director.

The liquidator/administrator.

Question 40

Insolvent company claims: Fraudulent trading

What are the conditions for a claim in fraudulent trading?

Where fraudulent trading might be relevant, how is the claim usually brought?

Answer 40

In the course of the company being wound up, the business was carried out with the intent to defraud creditors, or for any fraudulent purpose.

Where fraudulent trading might be relevant, it is common practice is to bring a claim for both wrongful and fraudulent trading.

Successful claims are rare - difficult to show intention to defraud.
Claims are brought by the liquidator/administrator. Again, only applies to insolvent liquidation or insolvent administration.

Any knowing parties to such activity may be liable to make such contributions as the court deems proper.

Question 41

Insolvent company claims: Misfeasance

What is misfeasance?
Other than a contribution to the company’s assets, what might the court order?

Answer 41

• A breach of any duty by directors.
• Repayment, restoration or account for any money or property misapplied in breach.

Question 42

Controls on directors

What are the main controls on directors?

Answer 42

• Substantial property transactions (SPT)
• Loans to directors
• Payment for loss of office

Note: provisions in relation to substantial property transactions (SPTs), loans to directors and payment for loss of office include shadow directors.

Other liabilities:

• Failure to maintain company records
• Failure to file certain documents
• Liability for financial records
• Liability for breach of health and safety legislation
• Bribery
• Political donations
• Breaches of environmental legislation

Question 43

Controls on directors: SPTs (ss.190 - 196 CA)

When does a substantial property transaction occur?

If the board wishes to enter an SPT what is required?

Answer 43

A director (or someone connected with them) in their personal capacity buys or sells a non-cash asset of substantial value from/to the company

If the board wishes to enter an SPT, the shareholders must approve by ordinary resolution.

Example - a director sells office premises to the company above market value.

If the director is also a director of the company’s parent company, an ordinary resolution of the parent company would be required as well.

The board would not need to obtain shareholders’ consent for the company buying office premises. It is the director’s involvement in their personal capacity that triggers this requirement.

Question 44

Controls on directors: SPTs (ss.190 - 196 CA)

Who is a connected person?

Answer 44

(1) a family member;
(2) a company in which the director or person connected:
- owns at least 20% of the body corporate’s shares; or
- is entitled to control the exercise of more than 20% of the voting power of a general meeting of the company.

Family members include:

• spouse/civil partner
• child or stepchild
• parents
• any person in an enduring relationship
• any children of a person in an enduring relationship

Question 45

Controls on directors: SPTs (ss.190 - 196 CA)

What is a non-cash asset of substantial value?

Answer 45

Non-cash asset: any property or interest in property other than cash.

Substantial:
- over $100,000; or
- worth more than $5000 and constitutes more than 10% of the company’s net asset value.

E.g. a loan would not be a non-cash asset.
To check whether the asset is more than 10% of the company’s net asset value, you would need to see the net assets in the balance sheet.

Question 46

Controls on directors: SPTs (ss.190 - 196 CA)

When would shareholder approval not be required.

Answer 46

(a) the transaction was made in his character as member of the company, or

(b) for a transaction between—

• a holding company and its wholly-owned subsidiary, or
• two wholly-owned subsidiaries of the same holding company.

Question 47

Controls on directors: SPTs (ss.190 - 196 CA)

Where shareholder approval was not given for an SPT, what is the effect?

Who may also be ordered to account to the company for any gain made and to indemnify the company for any resulting loss?

Answer 47

The transaction is voidable.

• any other director who authorised the arrangement (including of the holding company);
• any connected person

Question 48

Controls on directors: Loans to directors

What is required when the company proposes to make a loan to a director?

Answer 48

• Shareholder approval by ordinary resolution.
• A memorandum of the loan terms, available for inspection for 15 days prior to the general meeting and at the meeting itself.

If the director is also a director of the holding company, that holding company also needs to pass an ordinary resolution

Alternatively, if by written resolution, the memorandum must be sent out with that resolution (in which case, it need not be available for inspection).

Question 49

Controls on directors: Loans to directors

When is an ordinary resolution not required?

Answer 49

If the loan constitutes:
- expenditure on the business up to $50,000
- expenditure on defending legal or regulatory proceedings in relation to the company or associated company;
- minor and business transactions up to $10,000.

Expenditure on the business = for the purposes of the company or enabling the director to properly perform their duties.

Question 50

Controls on directors: Loans to directors

What is the effect of a loan in breach of the requirement for shareholder approval?

Answer 50

• The loan is voidable, but can be affirmed within reasonable time by ordinary resolution.
• The director and any director authorising it are liable to account to the company for any gain.
• Joint and several liability to indemnify the company for any loss.

Where the directors are also the shareholders, it is unlikely that they would avoid the contract. Instead, the more likely scenario is where the company is insolvent and an insolvency practitioner avoids the contract, to pursue the director for immediate repayment.

Question 51

Controls on directors: Payment for loss of office

When do payments to directors for ending their directorship require shareholder approval and what type of approval is required?

Apart from past directors, who else does this apply to?

Answer 51

When the payment is $200 or more and the director is not legally entitled to it. Ordinary resolution.

• Connected persons;
• Any person at the direction or benefit of the director or connected person.

Examples of legal entitlement would be: as provided in their service contract, or as compensation for unfair or wrongful dismissal. The company is under a legal obligation to pay these types of sums.

A memorandum containing particulars of the payment must be drawn up and made available for 15 days prior to the general meeting and at the general meeting itself. Alternatively, it can be sent alongside a written resolution.

Question 52

Controls on directors: Payment for loss of office

What is the effect of the company paying the director for loss of office without shareholder approval?

Answer 52

• the money will be held by the director on trust for the company.
• any director who authorised the payment is jointly and severally liable to indemnify the company for any loss.