Directors Duties Flashcards
What is the primary responsibility of directors in a company?
Directors have day-to-day control over the company’s business and its assets.
Who owns the company?
The shareholders own the company.
What is the difference between the roles of shareholders and directors?
Shareholders focus on their rights, while directors focus on their duties.
What is one major temptation directors might face?
Using their power for personal benefit instead of for the company.
What does the Companies Act 2006 impose on directors?
Duties including equitable ‘fiduciary’ duties and common law duties of care, skill, and diligence.
What are fiduciary duties primarily aimed at?
Stopping directors from abusing their positions.
What do common law duties focus on?
Preventing incompetence and carelessness.
What transactions require shareholder consent according to the Companies Act 2006?
Borrowing money, selling substantial assets, and agreeing to long fixed-term service contracts.
What procedural requirement must directors with an interest in a transaction follow?
Directors must disclose any interests in decisions taken by the board.
What can happen to directors of insolvent companies?
They can be made to contribute to the company’s assets.
What is the consequence of breaching certain provisions of company law?
It can be a criminal offence.
To whom are directors’ duties owed?
To the company, not to individual shareholders.
What can a liquidator do in the case of company insolvency?
Bring a claim on behalf of the company for breach of duty.
What is one of the most significant changes brought by the Companies Act 2006?
The codification of directors’ duties.
How many general duties are outlined in the Companies Act 2006?
Seven general duties.
What is the duty to act within powers according to section 171?
Directors must act within the powers given to them by the company’s articles.
What is the duty to promote the success of the company according to section 172?
Directors must act in good faith to promote the success of the company for the benefit of its members.
What must directors consider under section 172?
- Likely consequences of decisions in the long term
- Interests of the company’s employees
- Business relationships with suppliers and customers
- Impact on the community and environment
- Reputation for high standards
- Fairness among members
What is the duty to exercise reasonable care, skill, and diligence according to section 174?
Directors must exercise care, skill, and diligence that a reasonably diligent person would.
What are the remedies for breach of the general duties?
Equitable remedies for most duties, common law damages for breach of section 174.
What are fiduciary duties derived from?
Duties owed by trustees.
What is the principle underlying section 172?
Directors should act in the best interests of the company.
What does section 175 require directors to do?
Avoid conflicts of interest.
True or False: Section 175 applies to transactions with the company.
False.
Fill in the blank: The duty to declare interest in proposed transactions is outlined in section _______.
177
What is the purpose of section 175 of the Companies Act 2006?
Section 175 addresses conflicts of interest that directors may have when entering into transactions not with their company
What is required for private companies incorporated before October 1, 2008, regarding conflicts of interest?
Shareholders must pass an ordinary resolution granting directors the power to authorize conflicts
What section requires directors to disclose their interests in transactions?
Section 177
Fill in the blank: Directors must declare their interest by the time the company enters into the _______.
[transaction]
What happens if a director fails to declare their interest in time?
They commit a criminal offence
What is the common law duty imposed on directors regarding care, skill, and diligence?
Section 174 states a director must exercise reasonable care, skill, and diligence
What two-part test is used to determine a director’s standard of care?
- General knowledge, skill, and experience expected of a person in that role. 2. The specific knowledge, skill, and experience of the director
How does the standard of care differ for executive and non-executive directors?
Executive directors are held to a higher standard and must devote more time to their roles
What legal remedy is usually available for breach of common law duties by directors?
Common law damages
What is the rule in Foss v Harbottle?
It states that the company is the proper claimant if a wrong is done to it
What is a derivative claim?
A procedure allowing minority shareholders to bring an action against wrongdoers in the company’s name
What is the purpose of section 994 of the Companies Act 2006?
It allows any member to petition the court for unfairly prejudicial conduct in the company’s affairs
What does section 180 sub-section (4) allow regarding conflicts of interest?
It allows a company’s articles to contain rules exempting directors from liability under certain conditions
What must directors do if they want to authorize a transaction under section 175?
They must disclose their interest to the board
True or False: Authorization under section 175 excuses breaches of other general duties.
False
Fill in the blank: Directors can delegate their responsibilities but must _______ the people to whom they have delegated.
[supervise]
What section of the Companies Act allows for the ratification of a breach of duty by shareholders?
Section 239
Ratification can be done by an ordinary resolution of the members.
What are the limited exceptions set out in which section that protect directors from some consequences of breaches?
Section 180
These exceptions do not protect directors from all consequences of a breach.
Which section of the Companies Act states that provisions excusing directors from breaches are void?
Section 232
There is an exception for provisions dealing with conflicts of interest.
What option do companies have to protect directors against liability for breaches?
Purchase insurance
This is permitted under section 233.
Fill in the blank: A breach can be __________ by shareholders through a resolution.
ratified
What is the term used for shareholders passing a resolution to exonerate a director after a breach has occurred?
Ratifying the breach
This can be done by an ordinary resolution of the members.
Under which section can shareholders give advance authorisation for breaches of duty?
Section 180 sub-section 4
This preserves old common law rules for advance authorisation.
NB: this cannot override statutory requirements or the company’s articles
What is one condition under which advance authorisation cannot occur?
If it would involve a fraud on the minority
The meaning of ‘fraud on the minority’ has a lot of case law surrounding it.
True or False: Directors can be exempted from liability for any breach under the Companies Act.
False
Directors cannot be exempted from liability for any breach that occurs.
Which section allows a court to excuse directors who acted ‘honestly and reasonably’ despite breaching their duties?
Section 1157
This is a last resort for directors who have exhausted other options.
What is a key consideration for the court when deciding on derivative claims under section 263?
Whether the breach has been ratified
This is one of the factors the court must consider.
What can happen to directors if a company becomes insolvent?
They may face proceedings against them
Directors can also face disqualification from their role.
What is the primary focus of a Section 994 claim under the CA 2006
Protecting the individual shareholders from unfairly prejudice conduct by the majority shareholders of those controlling the company
What is the primary focus of a Section 994 claim under the CA 2006
Protecting the individual shareholders from unfairly prejudice conduct by the majority shareholders of those controlling the company
What is the focus of a derivative claim ?
Addressing harm caused to the company itself, typically by directors breaching their duties or engaging in misconduct
Who benefits from a section 994 claim?
The individual shareholder bringing the claim.
What is a common remedy for a Section 994 claim?
A common remedy is an order for the majority shareholders to buy out the petitioners share at a fair value or changes to company governance
Who benefits from a derivative claim?
The company
What is required before a derivative claim can proceed?
The courts permission, ensuring the claim is in the company’s best interest
What types of action would warrant a Section 994 claim?
Actions that unfairly prejudice the shareholder: exclusions from management, dilution of shares without proper justification, withholding dividends unfairly, misuse of company funds affecting shareholder returns
What types of actions would warrant a derivative claim?
Actions that harm the company: beach if directors fiduciary duties, misappropriation of company assets by a director, failure to exercise care,sp skills and diligence, authorising illegal transactions or self-dealing by directors
