Directors' Duties

Question 1

What is the Role of the Board?

Answer 1

To manage the day-to-day operations of the Firm.

Question 2

On what Matters can the Board act?

Answer 2

All issues not explicity restricted by the Companies Act or the Firm’s Articles.

It may also delegate this authority as they see fit.

Question 3

What are the Statutory Directors’ Duties?

Answer 3

• S. 171: To act within their powers and only use them for their prorper purpose.
• S.172: To act in the way they honestly believe is most likely to promote the success of the Firm and its Members as a whole.
• S.173: To exercise their judgement independently.
• S.174: To act with reasonable care, skill, and diligence.
• S.175: To avoid situtations that may give rise to an unauthorised direct or indirect conflict of interest.
  
  • This applies particularly to the exploitation of any property, information, or commercial opportunity.
• S.176: To avoid accepting benefits from third parties conferred by reason of their status, action, or omission.
• S.177: To declare the nature and extent of any conflicts of interests in any proposed transaction or arrangement.

Question 4

To whom does the Board legally owe its Duties?

Answer 4

The Firm itself.

CA 2006 — s. 170.

Question 5

When does S. 175 disapply?

Answer 5

• The conflict is authorised by the Board.
• The prospect of a conflict is reasonably unlikely.
• The conflict concerns a transaction or arrangement with the Firm.

Question 6

When does S. 177 disapply?

Answer 6

• The conflict is already known by the Board.
• The conflict concerns their service contract.
• The prospect of a conflict is reasonably unlikely.
• The Director is reasonably unaware of the conflict or the transaction or arrangement.

Question 7

MA 14(1) prohibits Interested Directors from Voting on the relevant Transaction or being included in the Quorum. When does this disapply?

Answer 7

• The prospect of a conflict is reasonably unlikely.
• The conflit arises from a permitted cause, as defined in the Articles.
• The Board disapplies MA 14(1) by Ordinary Resolution each time it activates.

Question 8

How may a Director undertake an action that would constitute a Breach of their Duties?

Answer 8

By making a full disclosure to the Shareholders and securing their approval through an Ordinary Resolution.

CA 2006 — s. 180(4).

This does not apply to unlawful acts.

Question 9

Is an act undertaken in Breach of Directors’ Duties automatically void?

Answer 9

No, and Shareholders may choose to ratify it by Ordinary Resolution.

CA 2006 — s. 239(2).

This does not apply to unlawful acts.

Question 10

What are the Remedies for a Breach of Directors’ Duties?

Answer 10

• For S. 174, damages.
• For all others:
  
  • Damages;
  • Injunction;
  • Voiding of the transaction;
  • Restoration of company property;
  • Restitution and account of profits;

Question 11

How many Directors must a Company have at least?

Answer 11

• If Private, one.
• If Public, two, one of which being natural.

CA 2006 — ss. 154, 155(1).

Question 12

What is a Du Jure Director?

Answer 12

A validly-appointed Director.

Question 13

What is a De Facto Director?

Answer 13

One who assumes to act as a Director without valid appointment.

Question 14

What is a Shadow Director?

Answer 14

A person whose directions or instructions the Board is accustomed to act in accordance with.

Companies Act 2006 — §251(1).

Secretary of State v Deverell [2001] Ch 340 at 354.

Question 15

What is the Effect of becoming a Shadow Director?

Answer 15

The party assumes the duties and liabilities of an ordinary Director.

Question 16

How does a Party become a Shadow Director?

Answer 16

By having actively and effectually influenced the Firm’s corporate affairs from a managerial or governance persepctive on an objective basis.

HM Revenue and Customs v Holland [2010] UKSC 51.

Question 17

Must a Firm have a Company Secretary?

Answer 17

• If Priavte, no.
• If Public, yes.

CA 2006 — ss. 270, 271.

Question 18

How are Directors usually appointed?

Answer 18

• By an ordinary Shareholder Resolution; or
• By a decision of the Board.

Model Articles — Art. 17.

Usually, the latter is preferred for reasons of ease, speed, and convenience.

Companies House must be notified of any changes to Board composition.

Question 19

When is Shareholder Approval required to authorise a proposed Transaction or Arrangement?

Answer 19

• Financial transactions with Directors.
• Substantial property transactions.
• Directors’ Long-Term Service Contracts.

This applies to both the Firm’s Directors and its Parent’s.

Question 20

What type of Shareholder Approval is required to authorise a proposed Transaction or Arrangement?

Answer 20

On Parent Directors:
* If a Parent Director is involved, both the Firm and the Parent must pass ORs.

• If a Parent Director is not involved, only the Firm must pass an OR.

On Wholly-Owned Subsidiaries:

• If the Firm is wholly-owned, an OR is not necessary; however
• If a Parent Director is involved, the Parent must pass an OR.

On Downstream Transactions:

• If the transaction flows from the Parent to the Firm, an OR is not necessary.

Question 21

What is a Substantial Property Transaction?

Answer 21

• An acquisition or disposal;
• By a Director (or Connected Person) of the Firm or its Holding Company;
• Of a Substantial non-cash asset to or from the Firm.

Connected Persons include business partners, investees, and family members (excluding brothers, sisters, grandparents, grandchildren, uncles, and aunts).

Question 22

When is an Asset considered Subtantial?

Answer 22

• Assets worth £5,000 or less are not Substantial.
• Assets worth over £100,000 are Substantial.
• Assets with an in-between value are only Substantial if they are worth over 10% of the Firm’s net asset value.

If the Firm is recently incorporated, i.e. without annual accounts, its called-up share capital is the relevant benchmark.

Question 23

What happens if a Substantial Property Transaction is executed without Shareholder Approval?

Answer 23

• The authorising Directors (and Connected Persons) are jointly and severally liable to account for profits and indemnify the Firm for losses and damages suffered.
• The transaction is voidable unless:
  • Restitution is impossible;
  • The Firm has been indemnified for losses or damages suffered; or
  • Rights acquired by a bona fide Third Party would be affected by voiding.

Defences include reasonable unawareness of the nature of their conduct and having taken all reasonable steps to ensure compliance.

Question 24

Comparing Public and Private Companies, which types of Financial Transactions with Directors require Shareholder Approval?

Answer 24

Private Companies:

• Loans to Directors.
• Security to Directors.
• Guarantees to Directors.

Public Companies:

• Loans to Directors or Connected Persons.
• Security to Directors or Connected Persons.
• Guarantees to Directors or Connected Persons.
• Quasi-Loans to Directors or Connected Persons.
• Transactions on Credit with Directors or Connected Persons.

These rules also apply to Directors of Holding Companies and to Private Companies associated with Public Companies.

Private Companies associted with Public Companies, i.e. subsidiaries, are subject to the extended restrictions.

Question 25

What constitutes ‘Association’?

Answer 25

• Control or Influence: Companies are associated if one controls or significantly influences the other.
• Parent-Subsidiary Relationship: Holding Companies and Subsidiaries are automatically associated.
• Connected Persons: Companies controlled by a Director or Connected Persons are considered associated.
• Group Structure: Companies in the same Corporate Group are associated.

Question 26

Under what conditions is Shareholder Approval not required for Financial Transaction with a Director?

Answer 26

• S. 204: Expenditure on company business, up to £50,000).
• S. 205: Loans for defending proceedings brought against a Director;
• S. 206: Loans for defending regulatory actions or investigations.
• S. 207: Loans and Quasi-Loans of up to £10,000 and Transactions on Credit of up to £15,000.
• S. 208: Intra-group transactions.
• S. 209: Money lending companies where the loan is made in the ordinary course of business.

Question 27

What happens if a Financial Transaction with a Director is executed without Shareholder Approval?

Answer 27

• The Directors (and Connected Persons) are liable to account for profits and indemnify the Firm for losses and damages suffered.
• The transaction is voidable unless:
  • Restitution is impossible;
  • The Firm has been indemnified for losses or damages suffered; or
  • Rights acquired by a bona fide Third Party would be affected by voiding.

Defences include reasonable unawareness of the nature of their conduct and having taken all reasonable steps to ensure compliance.

Question 28

What is a Long-Term Service Contract?

Answer 28

A contract with a Guaranteed Term in excess of two years.

Question 29

What is a Guaranteed Term?

Answer 29

The period during which the Director cannot be terminated, namely because:
* The Firm does not have the absolute right to terminate their contract for a certain period; or
* The Firm must provide notice prior to termination, during which they remain employed.

When calculating the Guaranteed Term, you add the two periods.

Question 30

What happens if a Long-Term Service Contract is executed without Shareholder Approval?

Answer 30

• The relevant clauses are void to the extent of contravention; and
• The Firm will be able to terminate at any time with reasonble notice.

Question 31

What information about Directors and Company Secretaries must the Firm store at its Registered Address?

Answer 31

• Service contracts.
• Personal information, including name, date of birth, service address, etc.

Question 32

Where must information about Directors’ financial arrangements with the Firm be disclosed?

Answer 32

The Firm’s Annual Accounts.

CA 2006 — ss. 412, 413.

This includes remuneration, benefits, advances, etc.

Question 33

How are Directors or Auditors usually removed?

Answer 33

By an Ordinary Resolution.

CA 2006 — s. 168(1).

Henceforth, this is called a Removal Resolution.

Question 34

What is the Notice Period for Removal Resolutions?

Answer 34

At least 28 Clear Days before the GM, specifically to the Firm’s Board and the relevant Director(s).

CA 2006 — s. 168(2).

This is called Special Notice.

The Board must ensure the relevant Director(s) receive the notice ASAP, so that they may exercise their right to protest.

Question 35

Upon receiving Special Notice for a Removal Resolution, what are the Board’s Two Options?

Answer 35

Placing the Resolution on the Agenda, in which case:

• It must notify all Shareholders of the Resolution, as per usual, at least 14 Clear Days before the GM.

Not placing the Resolution on the Agenda, in which case:

• The Shareholders will attempt to force a GM with the Resolution on the Agenda under s. 303(1).
• To do so, they require at least 5% of the Firm’s paid up voting share capital.
• The Board must call a GM within 21 days of receipt and hold the GM within 28 days of calling.
• If the Board again fails to act, the Shareholders can call a GM themselves.
  • Notice, 14 Clear Days.
  • Held, 3 months of receipt of the s. 303 Request.

A s. 303 Request must state the general nature of the business the Shareholders want dealt with at the GM, and may include the text of Resolutions they want proposed.

In practice, Shareholders will send a s. 303 Request alongside Special Notice to ensure the matter is resolve ASAP.

Question 36

What is the Director’s Right to Protest?

Answer 36

• The right to make written representations explaining why they should not be removed.
  • These representations should be circulated to Shareholders, and if not, read aloud at the GM.
• The right to speak in their defence at the GM.

CA 2006 — s. 169.

Question 37

As a Lawyer, what should you avail yourself of whether a Director on the Chopping Block is also a Shareholder?

Answer 37

Whether there is:

• A Shareholders’ Agreement that requires unanimty for the removal of a Director.
• A Bushell v Faith Clause giving the Directed weighted voting rights that make an Ordinary Resolution impossible to pass.

Putting a Unanimity requirement to remove the Director would be void, since it contravenes CA 2006.

If the Company is party to a Shareholders’ Agreement, it needs to be Carved-Out of any Unanimity provisions.

Forced Transfer provisions should also be checked.