Directors Duties Flashcards
Directors duties
Duty to promote success of company
Duty to act within powers
Duty to exercise independent judgement
Duty to avoid direct or indirect conflict of interest with company
Duty to exercise reasonable care, skill and diligence
Duty not to accept benefits from third parties
Duty to declare interest in proposed transaction or arrangement with company
Duty to act within powers
S171- act in accordance with the constitution and only exercise powers for purposes they are conferred
How do the courts determine the purpose of a directors powers
Objectively
Duty to exercise independent judgement
S173- act independently rather than contracting job out to others
Allowed to act in any way authorised by constitution or in accordance with agreement entered into by the company which restricts discretion
Avoid direct or indirect conflict of interest with company
S175- unless situation cannot reasonably be regarded as likely to give rise to conflict or authorised by directors
Duty to promote success of company
S172 must act in a way he considers in good faith would be most likely to promote the success of the company for the benefit of its members as a whole
Test used by the court to determine if D promoted success of company
Subjective test
Did D consider in good faith that their actions were most likely to promote success of company
Duty to exercise reasonable care skill and diligence
S174 exercised by a reasonably diligent person with knowledge skill and experience reasonably expected of a director
Must actively supervise anyone they delegate to
Test to determine if director breached duty to exercise reasonable care skill and diligence
Breached if the director is negligent and falls below standard two part test
Objective test- the role and standard of care expected
Subjective test - skills, expertise and responsibility of that particular director
Duty not to accept benefits from third parties
S176- if conferred because he is director or by doing anything as director unless acceptance cannot reasonably be regarded as likely to give rise to a conflict of interest
Duty to declare interest in proposed transaction or arrangement with company
S177- declare nature and extent to other directors at board meeting or by notice
When must a declaration of interest by a director under S177 be made
Must be made before company enters into transaction
Criminal offence not to declare
How can a breach of S175 be authorised (CofI)
Authorised by other directors
Insurance to cover directors
Relief by court where director is liable for negligence, default breach of duty or breach of trust. Only if director acted honestly and reasonably. They cannot apply for relief to court themselves
Ratification by ordinary shareholders resolution at GM or written resolution. Cannot ratify if unfair, illegal or oppressive to a minority
Consequences of a breach of directors duty
Account for profits Return property Pay equitable compensation Recission of contract Injunction against director
For breach of S174 (rcsd) damages for negligence
When is a director liable for company debts
If D personally guaranteed loan and company defaults it can be enforced against D
If D is acting when disqualified
Wrongful trading unless D took every step to minimise loss to creditors after he became away of prospect of liquidation
Political donation without shareholder approval
D must compensate company for loss due to untrue or misleading statements in the directors report
If D authorised illegal dividend payment to members then D will have to repay
Any breach of fiduciary duty or other duty of D, D may have to repay money or contribute to assets of company to compensate
When a substantial property transaction is not approved by shareholders
When does a director risk going to prison.
10 years for bribery
2 years for failure to keep proper records
2 years for breach of health and safety
2 years for failing to protect share capital
Two tests for wrongful trading
D knew or ought to know there was no reasonable prospect that the company would avoid liquidation
What did D know
What would a reasonable D have known in the circumstances
Defence to wrongful trading
D took every step with a view to minimising potential loss to creditors after he become aware that company have no prospect of avoiding liquidation
When is D liable for fraudulent trading
The business of the company was carried on with the intent to defraud creditors. The director must have known that creditors would not be paid
What is misfeasance
Any breach of fiduciary or other duty of director.
Director may be ordered to repay money or contribute to assets of company to compensate
How can a director avoid liability for breach of duty
S239- shareholders may ratify conduct of director which amounts to a breach of duty but an ordinary resolution or written resolution
Not if unfair illegal or oppressive to minority
Approval required for a substantial property transaction
S190- need shareholder approval. Ordinary resolution or written resolution in
When is a property transaction substantial
Over £100,000 or over 5000 and 10% of net asset value
What if a substantial property transaction is not approved by shareholders
Contract is voidable by company unless restitution of property / money is not possible. director is liable for loss to company and must account for gain
Shareholders can ratify failure to obtain approval
