Directors duties

Question 1

The role of directors?

Answer 1

They:
- Manage the company on a day-to-day basis on an agency basis
- Certain actions can only be taken by directors if shareholders have given authority
- Owe duties to the company

Question 2

Types of directors?

Answer 2

A director:
- De jure
o Appointed validly by law
o A private co must have 1 as per s154
o A public co must have 2 as per s154
- De facto
o Someone who assumes to act as director
o Fiduciary duties apply equally to this type.
- Shadow
o A person in accordance with whose directions or instructions of the company is accustomed to act
- Executive and non-executive
o Exec – appointed to executed office
o Non-exec – not an employee of company but an officer – not in day to day just to generally provide independent guidance and advice to the board
- Alternative
o Someone who has been approved by resolution of the board of directors or a fellow director who votes in absence
Company secretary – deals with company’s legal administrative requirements
- Ltd.’s does not need to have one, Plc’s MUST

Question 3

Appointment of a director?

Answer 3

so this is governed by articles of a company

SO NEED A BOARD RESOLUTION TO GET A GM.
MA
- By ORDINARY resolution of shareholders MA17
- By a decision of director MA17
Service contracts
- An executive director will be an employee of the company as well as one of its officers – as an employee they receive service contract which sets out terms and conditions of duties and pay. No automatic entitlement for directors to be paid
- Duty to keep directors service contracts at its registered office for inspection by members.
- SH approval needed to long-term service contracts

Question 4

Requirements of a director?

Answer 4

Disclosure of identity and company secretary
- Every company must maintain a register of its directors
- Must also notify registrar of companies of charges relating to directors
Privacy
- CA 2006 allows for more confidentiality – only service address for director needs to be included for review by public
Disclosure in annual accounts
- S412 – relates to information about directors’ remuneration and what needs to be included.
- Directors’ salaries, bonus payments and pension entitlements
- Compensation paid to directors and past directors for loss of office
- Also requires any person connected to such a director
- Section 413 – relates to disclosure of info on advances and credits given by a co to its directors

Question 4

Removal of director by shareholders?

Answer 4

• Ultimate sanction
• S168 – by ordinary resolution remove a director before expiration of their period in office
• S168(2) special notice – 28 clear days is required for such a removal resolution.
• Not possible unless articles provide for this

Question 5

Vacation from office?

Answer 5

• Resignation by notice
• May resign from board by tendering a letter of resignation – MA18 usual NOT OBLIGATORY for board to pass a resolution accepting it
• Automatic termination
• Under MA18 a person ceases to be as soon as:
• Disqualified from being a director
• Director becomes subject of individual voluntary arrangement
• Becomes bankrupt
• Registered medical practioner states in writing the director is mentally or physically incapable
• Disqualification – Company directors disqualification act 1986
• Court may make a disqualification order against a person preventing them, unless they obtain leave of court
• Grounds include fraudulent or wrongful trading
• Maximum of 15 years
• Retirement by rotation
• MA for plc. requires retirement and reappointment by members every 3 years
• Companies house filing requirements
• Must update company’s registrar of directors by filling in TM01

Question 5

Duty of directors? Duty to act within powers?

Answer 5

(s 171 CA 2006);
- Duty to act within company’s constitution
- Duties to exercise powers for purposes for which they are conferred – (not for personal gain)

Question 5

Duty to promote success of the company?

Answer 5

s 172
CA 2006);
- Seen as codifying previous common law duty to act honestly and in good faith in best interests
- Must act in a way for benefit of members as a whole and that success is meant as long-term increase in value
- Duty is to company not third parties. As such must regard:
- Likely consequences of any decision in the long term
- Interest of company’s employees
- Forster business relationships
- Impact if company’s relationship with community and environment desirability of maintaining a reputation for high standards of business
- These together would be considered as necessary good business practice as part of the ‘enlightened shareholder value’ which describes the middle way between purely maximising SH values and a pluralist approach to other stakeholders
- In practice – companies ensure board minutes clearly note that consideration has been given to s172

Question 6

Duty to exercise independent judgement?

Answer 6

s 173 CA 2006);
- Duty if NOT infringed by his acting:
- In accordance with an agreement entered into by the company that restricts the future exercise of discretion by its directors
- In a way authorised by company’s constitution

Question 7

Duty to exercise reasonable care and skill and diligence?

Answer 7

(s 174 CA 2006);
- Its assessed objectively and subjectively
- What’s reasonably expected of someone in their role and their skill and knowledge as director
- Can be raised higher if they have specialist knowledge

Question 8

Duty to avoid conflicts of interest?

Answer 8

(s 175 CA 2006);
- Avoid a situation that conflicts with interest of company
- No excuse to say that the opportunity is not one which the company could have exploited itself
- Cannot be said to be infringed if conflict arises
- In relation to a transaction with company (these are subject to duty of disclosure
- In relation to a matter which is authorised by the directors

Question 9

Duty to not accept benefit from third parties?

Answer 9

• Also aimed at conflict of interest
• Not accept benefits conferred by reason of them being a director
• BUT NOT breached if acceptance could not possible be regarded as likely to give rise to a conflict on interest

Question 9

Duty to declare any interest in a proposed transaction?

Answer 9

(s 177 CA 2006)
- Procedural matters
- Applies equally to indirect interest – director does not have to be a party to transaction – even a spouse
- Must declare before transaction is entered into
- Must be at BM or writing in advance but sent to all
- Under s185 can give general notice
Does not need to make a declaration when:
- Director is not aware of interest
- Cannot reasonably give rise to conflict of interest
- If conflict arises because it concerns their service contract
Ma 14 – specifies that a director who is interest in a transaction cannot vote or count in quorum for board resolution in respect of that
- Can be if company disapplies MA 14 by ordinary resolution

Question 10

Remedies for breach of duty?

Answer 10

• S178 consequence of breach is same as for breach of corresponding common law or equitable principles
  (Injunction, setting aside a transaction - restitution, restoration of company profits and damages)
• Exception is s174 (exercise reasonable care and skill) which is damages

Shareholder approval in advance of what would be a breach
- Cannot approve of unlawful acts this way authorisation is only effective provided there has been full disclosure by directors so SH are properly aware
Ratification for breach of duty
- Shareholders by ordinary resolution can ratify
- Negligence
- Default
- Breach of duty
- Breach of trusts

Question 11

Transactions with directors? Directors long terms service contracts?

Answer 11

Shareholder approval by ordinary resolution is required for any directors’ service contract excess of two years guaranteed term which means:
- Means a period during which contract us to continue other than at instance of company or where director is in control of how long the contract continues AND during this time the company either cannot terminate or can only terminate in specific circumstances
- Period of notice to be given by company will be the guaranteed term.
Exception
-Exception: Section 188(6)(b) CA 2006
Under s 188(6)(b) CA 2006 approval is not required by the members (shareholders) of any
company which is a wholly owned subsidiary of another company
Consequences of noncompliance s189
- Provision will be void as to extent of the contravention
- Contract will be deemed to contain a term entitling company to terminate at any time by giving reasonable notice
S188, MA14 and disclosures
- Disclosure of interest s177 – not required but often documented in board minutes
- Directors not permitted to vote or count in the quorum on any board resolution
- Members inspection rights s288
- Must keep all service contracts from at least one year during and from the date of termination or expiry of the contract for members to inspect

Question 12

Procedural issues?

Answer 12

Where the ordinary resolution is to be passed at a General Meeting, s 188(5)(b) CA 2006 sets out
that a memorandum setting out the proposed terms of the contract must be made available for
inspection by members of the company both:
(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.
A minimum of 15 days’ notice of the GM held to approve the contract will therefore have to be
given to shareholders (even if the short notice procedure is followed) unless the written resolution
procedure is used. You can see that this will impact on the speed with which the decision to
approve the service contract or not can be made. There is no such 15-day requirement for a
written resolution.
Where the written resolution procedure is being followed for passing the ordinary resolution
pursuant to s 188(5)(a) CA 2006, the memorandum setting out the proposed contract terms must
be sent or submitted to every eligible member at or before the time at which the proposed
resolution is sent or submitted to the member.

Question 13

Substantial property transactions?

Answer 13

Ss190-196
S190 governs substantial property transactions
- They Involve acquisition or disposal by a director of a company or a director of the company’s holding company of a substantial non-cash asset from or to the company. THE CONSIDERATION IS CASH.
- Permitted but require ordinary resolution
- ‘Non-cash asset’ means any property other than cash (s 1163 CA 2006).
- ‘Substantial’ is defined in s 191 CA 2006 as follows:
- * 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, i.e., the balance sheet.
Connected persons s252-254
- connected person to the director
- members of directors’ family
- bodies corporate in which director holds at least 20% of shares
- a business partner of director or those connected with them
- trustees of a trust the beneficiaries of which include director or persons connected with them.

• if a transaction between a company and a director of company’s holding company or someone connected the holding company will also need to approve the transaction by an ordinary resolution of its shareholders.
• EXCEPT where – it’s a wholly owned subsidiary of another company

Question 14

Remedies for substantial property transactions?

Answer 14

S195
- Transaction is voidable at the instance of the company unless:
- Restitution is no longer available
- Company has been indemnified for the loss or damage suffered
- Rights acquired in good faith would be affected by the avoidance
- Director and connected persons are liable to indemnify the company for any loss incurred
196 – also allows arrangement to be affirmed – which will mean its no longer voidable
Defences – if they took reasonable steps to ensure the company’s compliance with s190 WILL NOT be liable under s195
For any connected person if they can show they had no knowledge

Under s 177(1) CA 2006 a director would need to disclose the nature and extent of their interest to
the Board.
Under the exception in s 177(6)(b) CA 2006, it is arguable that an interested director need not
formally to declare an interest if the other directors are already aware of it. However, it is likely to
remain the practice that directors will continue to make the declaration so that it is documented in
the Board minutes.
Under MA 14(1), any interested directors will not be permitted to vote on the Board resolutions to
approve the contract and authorise a signatory. They cannot count in the quorum for Board
resolutions regarding the contract either.

Question 15

Loans and related transactions?

Answer 15

1. Loans to director
2. Quasi loan – company agreed to pay an outstanding mount owed by director to a third party in the understanding that the director would later reimburse the company
3. Credit transactions – company provides goods or services on accredit basis which will be paid at later date
4. Guarantees or provision of security for the above: where director obtains a loan form bank and company acts as guarantor

Question 16

Loans to directors?

Answer 16

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. If the company in
question is a private company that is not associated with a public company, these are the only
transactions for which shareholder approval is required under the CA 2006 loan provisions.

Associated with public companies means if it’s a subsidiary, or THE PARENT or a subsidiary alongside a public substidary.

Question 16

Quasi loans - DONT APPLY TO PRIVATE CO

Answer 16

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)

Question 17

EXCEPTIONS TO THE NEED FOR ORDIANRY RESOLUTION?

Answer 17

There are a number of exceptions to the requirement for shareholder approval, the details of
which are set out in ss 204 – 209 CA 2006. These are as follows:
* 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; and
* Section 209: Money lending companies (where the loan is made in the ordinary course of the
business of the company)

Question 18

Holding companies?

Answer 18

Holding company

As with s 190 CA 2006, 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.

7.5 Wholly-owned subsidiary exemption

As with both ss 188 and 190 CA 2006 approval is not required by the members of any company
which is a wholly-owned subsidiary of another company for these types of transactions.

Question 19

Defences?

Answer 19

If a transaction contravenes ss 200, 201 or 203 CA 2006 and 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 with those sections (s 213(6) CA 2006).
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 20

Remedies for loans and related transactions?

Answer 20

If shareholder approval is not obtained and no exceptions apply, the consequences are set out in
s 213 CA 2006. These are very similar to the consequences for breach of s 190 CA 2006, set out in
an earlier section. In relation to the transaction, the consequences are set out in s 213(2) CA
2006: the arrangement is voidable at the instance of the company unless:
* Restitution is no longer possible;
* The company has been indemnified for the loss or damage suffered by it; or
* Rights acquired in good faith by a third party would be affected by the avoidance.
The directors involved (and those so connected under s 213(4) CA 2006) are liable to account to
the company for any profits made and to indemnify the company for any loss incurred (s 213(3)
CA 2006).
Section 214 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. If it is affirmed, the arrangement may no longer be avoided under s 213 CA 2006.