Directors

Question 1

Where does director’s authority to manage the company come from?

Answer 1

MA3 Board free to make decisions on behalf of the company (except certain things reserved for shareholders).

Question 2

What are the categories of directors at law?

Answer 2

De jure, de facto, shadow

Question 3

What categories of director are there in practice?

Answer 3

Executive, non executive.

Question 4

What is a de jure director?

Answer 4

Validly appointed at law. Private Companies must have at least one and public at least two.

Must be at least one director who is a natural person.

Question 5

What is a de facto director?

Answer 5

Someone who assumes to act as a director but not been validly appointed. Fiduciary duties and liabilities will still apply to them.

Question 6

What is a shadow director?

Answer 6

A person in accordance with whose directions or instructions the directors of the company are accustomed to act. Most duties and restrictions apply equally to shadow directors.

Question 7

Executive director v Non-executive?

Answer 7

Executive has been appointed to executive office. Non-exec do not take part in the day to day running of the company.

Question 8

Are companies required to have a secretary?

Answer 8

CA 2006 private no unless articles require.

Public company must have a secretary.

Question 9

How can companies with MA appoint directors?

Answer 9

By an ordinary resolution of the shareholders (MA17(1)(a)); or
By a decision of the directors (MA17(1)(b)).

Question 10

What details about directors and secretary need to be disclosed?

Answer 10

Every company must maintain a register of its directors (s 162(1) CA 2006) and secretaries (s 275(1) CA 2006) and should keep these registers at its registered office.

Each company must also notify the Registrar of Companies (ie Companies House) of changes relating to its directors (s 167 CA 2006) or its company secretary (s 276 CA 2006) using forms published by Companies House (eg AP01 for Appointment of Director and APO3 for Appointment of Secretary).

Question 11

What information must the company’s register of directors keep about individual directors?

Answer 11

Name and former name, service address, country of residence, nationality, business occupation, date of birth.

N.b. secretaries contain name and address.

Individual directors will have to still provide their residential address, but this is on a separate and secure register.

Question 12

What disclosure is required in annual accounts?

Answer 12

The directors’ salaries, bonus payments and pension entitlements; and
Compensation paid to directors and past directors for loss of office.

Question 13

How can shareholders remove a director?

Answer 13

Under s 168(1) CA 2006, a company (ie the shareholders) may by ordinary resolution remove a director before the expiration of their period of office.
Under s 168(2) CA 2006 special notice (28 clear days) is required of such a removal resolution.

Question 14

In which ways may an individual cease to be a director?

Answer 14

1. Resignation by notice: A director may simply take the decision to resign from the Board by tendering a letter of resignation. This procedure is provided for in MA 18(f). It is usual, although not obligatory, in these circumstances for the Board to pass a Board resolution accepting the letter of resignation which will then be minuted in the minutes of the BM.

2.Automatic termination: Under MA 18 a person ceases to be a director as soon as:
- The director becomes disqualified from being a director;
- The director becomes the subject of an individual voluntary arrangement (or similar);
- The director becomes bankrupt; or
- A registered medical practitioner who is treating the director states in writing to the company that the director has become physically or mentally incapable of acting as a director and will remain so for more than three months.

3.Disqualification - Company Directors Disqualification Act 1986 (CDDA)

Question 15

What are the CH filing requirements when a director leaves office?

Answer 15

Update the company’s register of directors internally and also give notice to Companies House by filing form TM01 (Termination of appointment of director).

Question 16

In summary what are the director’s duties?

Answer 16

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 17

s171 - Duty to Act within powers explained

Answer 17

Act within company’s constitution and exercise powers for the purposes for which they are conferred.

Question 18

s172- Duty to promote the success of the company.

Answer 18

Act in a way which they consider in goof faith likely to promote the success of the company for the benefit of its members as a whole.

In exercising this duty, a director is required to have regard to a range of non-exhaustive matters which are set out in s 172(1) CA 2006, including:
* The likely consequences of any decision in the long term;
* The interests of the company’s employees;
* The need to foster the company’s business relationship with suppliers, customers, and others;
* The impact of the company’s operations on the community and the environment;
* The desirability of the company maintaining a reputation for high standards of business conduct; and
* The need to act fairly as between members of the company.

Question 19

How can companies ensure and show compliance with s172 (promoting success)?

Answer 19

Take board minutes to show consideration has been given to duty when making decisions.

Public listed companies are required to make an annual s172 statement in their accounts.

Question 20

s173: Duty to exercise independent judgement

Answer 20

Section 173(2) states that this duty is not infringed by his acting:

(a) In accordance with an agreement entered into by the company that restricts the future exercise of discretion by its directors; or
(b) In a way authorised by the company’s constitution.

They can rely on advice from others but must make their own judgments.
Directors must be
mindful of the individual nature of this duty when acting.

They cannot blindly follow others’ views without considering the interests of the company.

Question 21

174 CA 2006: Duty to exercise reasonable care, skill and diligence

Answer 21

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.

Question 22

175 CA 2006: Duty to avoid conflicts of interest

Answer 22

Avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

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) (s 175(3) CA 2006); or
* In relation to a matter which has been authorised by the directors (s 175(4)(b) CA 2006).

Question 23

s175(3) exception/exclusion

Answer 23

expressly excludes conflicts of interest arising in relation to transactions or arrangements with the company. These conflicts are subject to the duty of disclosure in s 177 CA 2006 for transparency purposes but are not prohibited.

Question 24

176 CA 2006: Duty not to accept benefits from third parties

Answer 24

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.

However, the duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest (s 176(4) CA 2006).

Note that, unlike the duty in s 175 CA 2006, the other directors cannot authorise an arrangement under this section. There is no provision allowing them to do so. It would be possible for the shareholders to approve a director’s proposed action in advance or for ratification under s 239.

Question 25

177 CA 2006: Duty to declare an interest in a proposed transaction

Answer 25

Any director who is indirectly or directly interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors.

Declare at a BM before the transaction, or in writing in advance of the BM. Can also give one-off general notice of particular thing.

Question 26

177 CA: When director is not required to make a declaration.

Answer 26

Sections 177(5) and (6) CA 2006 set out when a director is not required to make a declaration; namely when:

• 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 27

What are the remedies for a breach of director’s duties?

Answer 27

174 - damages.

All others - injunction; setting aside of transaction; restitution and account of profits; restoration of company property; damages.

Question 28

s177 and MA14 - can a director vote when interested in a proposed transaction?

Answer 28

MA 14 specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for Board resolutions in respect of that transaction or arrangement.

This can be disapplied by OR, or if the directors conflict arises from a permitted cause.

Question 29

Can shareholders approve a breach of duty in advance?

Answer 29

Yes, effective if there has been a full disclosure by the directors. Cannot approve unlawful acts in this way.

Question 30

Can shareholders ratify a director’s breach of duty?

Answer 30

Yes by OR can ratify negligence, default, breach of duty or breach of trust.

If a director holds shares in the company, then any votes to ratify their breach which attach to the shares held by them or any person connected with them (eg their spouse, children, parents or a company which they control) will be disregarded under s 239(4) CA 2006.

Unlawful acts can never be ratified.

Question 31

When is shareholder approval needed for a director’s service contract?

Answer 31

OR approval is needed for long term service contracts, which have guaranteed periods in excess of two years - during which time the company cannot terminate the contract or can only terminate it in specific circumstances.

Note that s 188(2)(b) CA 2006 also makes it clear that if the director is also a director of any holding company, the shareholders of the holding company will also need to give approval.

Question 32

Exception to the need for OR approval of director’s guaranteed long term service contracts

Answer 32

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

Question 33

What are the consequences of non-compliance with OR for long term directions service contracts?

Answer 33

The provision will be void to the extent of the contravention under s 189 CA 2006; and

The contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.

Question 34

How long do companies have to keep copies of directors service contracts for inspection at the registered office for?

Answer 34

At least one year during and from the date of termination or expiry of the contract for members to inspect.

Question 35

What are the procedural issues for approval for director’s long term service contracts?

Answer 35

When passed at a GM, memorandum setting out proposed terms of the contract must be available for inspection by the members at the registered office for not less than 15 days ending with the date of the meeting, and at the meeting itself.

Where written resolution is to be used, memorandum should be attached with or sent before the proposed resolution is sent or submitted to the member.

Question 36

What are substantial property transactions?

Answer 36

Substantial property transactions involve an acquisition or disposal by a director of a company or a director of the company’s holding company (or a person connected to such directors) of a substantial non-cash asset from or to the company.

Question 37

Are substantial property transactions permitted?

Answer 37

Yes but they require shareholder approval by OR.

Question 38

What is ‘substantial’ for the purposes of a substantial property transaction?

Answer 38

An asset worth £5,000 or less is not a substantial asset.

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. A company’s net asset value is that shown in its most recent statutory accounts, ie the balance sheet.

Question 39

What is a ‘connected person’ for the purposes of a substantial property transaction?

Answer 39

Members of the director’s family: spouse or civil partner, parents, children or step-children (s 253(2)).

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 other persons connected with them) hold at least 20% of the shares (s 254).

A business partner of the director or those persons connected with them (s 252(2)(d)).

Trustees of a trust the beneficiaries of which include the director or those persons connected with them (s 252(2)(c))

Question 40

What are the rules regarding substantial property transactions with directors of the company’s holding company?

Answer 40

The holding company will also need to approve the transaction by ordinary resolution.

Question 41

What are the exceptions to the substantial property transactions rule?

Answer 41

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

Question 42

What are the remedies for a breach of the substantial property transaction rule?

Answer 42

Transaction is voidable at the instance of the company unless:
- Restitution is no longer possible;
- The company has been indemnified for the loss.
-Rights acquired in good faith by a third party would be affected.

Directors including those that authorised the transaction are liable to account to the company for profits made and indemnify for loss incurred.

Section 196 CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period.

Question 43

What defences are available for a breach of the substantial property transaction rule?

Answer 43

D shows they took all reasonable steps to ensure the company’s compliance.

Connected person shows they had no knowledge, and directors who authorised this can show this too.

Question 44

What is the general rule regarding loans and related transactions with directors?

Answer 44

Permitted but may need shareholder OR approvall.

Question 45

What are loans?

Answer 45

COmpany lends money to a director.

Question 46

What are quasi-loans?

Answer 46

An example of a quasi-loan would be 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;

Question 47

What is a credit transaction?

Answer 47

A credit transaction includes any transaction entered into between the company and the director 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.

Question 48

What is a guarantee/provision of security?

Answer 48

E.g 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 49

What are the rules relating to LOANS GUARANTEES OR SECURITY for directors for ALL COMPANIES?

Answer 49

NO company may make loan to directors or directors of its holding company or give guarantees/enter into security without OR approval.

Question 50

What are the rules for PUBLIC COMPANIES and PRIVATE COMPANIES ASSOCIATED WITH PUBLIC COMPANIES for quasi-loans, credit transactions, and connected persons?

Answer 50

These companies also require shareholder approval by way of an ordinary resolution for:

• Loans to a person connected to a director of the company or a director of its holding company (s 200);
• 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; and
• 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 (ss 197, 198, 200, 201).

Shareholder approval is not required for these transactions if it is a private company not associated with a public company.

Question 51

What are the exceptions to the rules regarding loans, securities, guarantees, quasi loans?

Answer 51

• Section 204: Expenditure on company business (up to a maximum of £50,000);
• Section 205: Loans for defending proceedings brought against a director;
• Section 206: Loans for defending regulatory actions or investigations;
• Section 207: 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;
• Section 208: Intra group transactions;
• Section 209: Money lending companies (where the loan is made in the ordinary course of the
  business of the company).

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

Question 52

What if a loan/security etc is between a company and a director of the company’s holding company?

Answer 52

Holding company will also need to approve the transaction by OR.

Question 53

Defences for transactions (loans etc) entered into without SH approval?

Answer 53

If a transaction is entered into with a person connected with a director, that director will not be liable if they took all reasonable steps to ensure the company complied.

There is also a defence under s 213(7) CA 2006 for any connected person (if relevant) and any director that authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.

Question 54

What are the remedies for loans etc without SH approval?

Answer 54

Arrangement voidable at the instance of the company unless restitution no longer possible, company has been indemnified, or rights acquired in good faith by a third party would be affected.

D and connecteds to account for profits and indemnify for losses.

Can be affirmed by SHs and Holding company within a reasonable period.