Directors' duties and powers

Question 1

Where do directors derive their powers from?

Are general management powers collectively or individually placed on directors? / how must directors exercise their powers?

What does Art. 3 MA Plc say?

Answer 1

The articles of association

Directors must exercise their powers collectively by a majority decision of the board, unless allowed under the articles to delegate those powers to someone else

Art. 3 MA Plc = ‘General management clause’ = subject to the articles, the directors are responsible for the management of the company’s business, for which purpose they may exercise all the powers of the company
= not mean each individual director can exercise these powers

Question 2

How can directors’ general management powers be limited? (5)

Answer 2

1. An objects clause
2. An article imposing a specific limit on a power
3. An article allowing the members to give directions to the directors
4. A shareholders’ agreement - requiring shareholder approval for certain types of decisions
5. The CA2006 - imposes shareholder approval and procedural conditions

Question 3

What are the 5 special powers that are usually conferred by articles on the directors?

What happens when a decision is not management decision and there are no special powers authorising the directors to make it?

Answer 3

1. the power to delegate;
2. the power to reject transfers;
3. the power to pay and fix directors’ remuneration and fees;
4. the power to forfeit shares;
5. the chair’s right to a casting vote.

= shareholder approval may be required

Question 4

Do directors have the power to delegate?

If so, who to?

Can directors authorise sub-delegation?

How do boards handle delegation?

Answer 4

Yes = Art. 5 MA Plc = directors may delegate any of the powers which are conferred on them under the articles to such person, by such means, to such extent, in relation to such matters, and on such terms and conditions as they see fit.

Boards usually delegate extensive management powers to the executive directors

Yes = executives are usually allowed to sub-delegate

Most boards use a combination of formal delegation and the adoption of company-wide policies and procedures, which set authority limits for the various tiers of management

Question 5

Is setting the company’s strategy a management decision?

Would it be wrong to suggest that the board can delegate all management responsibilities?

Answer 5

Yes. It is one of several management decisions that, under the UK Code, must be performed by the board.

Accordingly, it is wrong to suggest that the board delegates all management responsibility to the executive directors.

Question 6

Do shareholders have the same powers as directors?

What power does Art. 4 MA Plc give shareholders?

In practice, do they use this power?

Answer 6

General rule = if articles confer a power on the directors, then shareholder cannot exercise that power themselves unless articles permit

• Art. 4 MA Plc = give shareholders a reserve power to instruct the directors by special resolution to take, or refrain from taking, specified action

• It’s easier for shareholders who oppose actions of directors to seek the removal of them and appoint new people in their place via ordinary resolution under s.168 CA2006 (to meet their objectives)

Question 7

Who are the general duties under s.171 - s. 177 CA2006 owed by and to who?

What are the duties based on?

Which types of directors do they apply to?

What is a fiduciary and a fiduciary duty?

Answer 7

Owed by the directors to the company

• S.170 CA2006 = general duties are based on common law rules and equitable principles

• General duties apply equally to shadow directors, executive directors, and non-executive directors

• A ‘fiduciary’ is a person in a position of trust (e.g. trustee) = a fiduciary duty is a duty of honesty owed by a person in a position of trust e.g. directors as officers of the company

Question 8

What is the s.171 CA2006 duty?

What does S.171(a) CA2006 say?

What 2 circumstances may a breach arise in?

What in the memorandum could limit the company’s powers and why might shareholders want this?

Answer 8

Duty to act within powers and for proper purposes

S.171(a) = duty to act within powers and in accordance with the company’s constitution

• Breach of duty may arise where:
1. Individual director or the board does something that is beyond the company’s powers
2. Individual director or the board does something that is within the company’s powers but not within their own powers

Objects clause = if don’t have one objects are deemed unrestricted, otherwise limit company’s powers
• Shareholders may wish to have one to prevent directors expanding into new business areas in which they and the company have no experience

Question 9

What are the consequences/remedies for a s.171(a) breach? (2)

Why can 3rd parties generally enforce a contract against the company even though it was illegal for the directors to enter the contract? (2)

When does s.40 CA2006 not apply?

Answer 9

1. Transaction is still enforceable by third parties dealing with the company in good faith under S.39 and S.40 CA2006.
2. Director account for any gains or compensate for losses
3. S.39 CA2006 = a contract entered into by a company cannot be invalidated on the ground that the contract is outside the scope of the company’s contractual capacity
4. S.40 CA2006 = in favour of a person dealing with the company in good faith, the power of the directors to bind the company is deemed to be free of any limitation

S.40 doesn’t apply to contracts entered into by the board with an individual director(s)

Question 10

How can a cosec support directors in fulfilling the S.171(a) duty? (3)

Which recent case links to s.171(a)?

Answer 10

Cosec should ensure that:
1. All powers and delegation of authority are properly documents = e.g. in a schedule of matters reserves for the board, terms of reference for committees, and a delegation of authority matrix for management

2. It is clear when powers are being exercised that they are being exercised by the proper body or Individual
3. Directors are aware of what powers they have under the articles of association, and which are granted by shareholder resolution

Hashmi v Lorimer-wing 2022

Question 11

What does S.171(b) CA2006 say?

Many cases concern abuses by directors of their powers to do what?

Describe the case of Hogg v Cramphorn Ltd.

What are the consequences/remedies for a breach? (2)

Answer 11

= directors must only exercise powers for the proper purposes for which they are conferred

• Many cases concern abuses by directors of their power to allot and issue new shares

Hogg v. Cramphorn Ltd = directors feared a takeover bid so allotted shares to parties likely to support them and enable them to continue in office = court declared allotment void = primary purpose of any power to allot new shares is to raise capital as and when required = directors had an improper collateral purpose

1. Transaction can be declared void - unless director had authority to enter it
2. Director account for any gains or compensate for losses

Question 12

What does s.172 CA2006 say?

Is this the primary duty?

What are the consequences/remedies for a breach? (2)

Answer 12

= directors must act in a way they consider, in good faith, would be most likely to the promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:
1. The likely long-term consequences of a decision
2. The interests of the company’s employees
3. The need to foster business relationships with suppliers, customers, and others
4. The impact of the company’s operations on the community and the environment
5. The desirability for the company to maintain a reputation for high standards of business conduct
6. The need to act fairly as between members of the company

Yes - as reflected in the UK CG Code

1. agreement voidable
2. account for gains or compensate company for losses.

Question 13

According to the CA2006, what is the purpose of the strategic report?

Which companies must produce a s.172 statement?

What does the s.172 statement describe?

Answer 13

= to inform members of the company and help them assess how the directors have performed their duty under s. 172

S.414 CA2006 = requires all large companies (whether quoted, unquoted, public or private) to include a s.172 statement in the strategic report

= describes how the directors have had regard to the matters set out in s. 172(1)(a) to (f) when performing their duty under s. 172

Question 14

What does s.173 CA2006 say?

What does it not prevent a director from doing? (2)

Describe the case of Englefield Colliery Co and when a director will be in breach.

What are the consequences/remedies for a breach? (2)

Answer 14

= directors must exercise independent judgment = must not fetter their discretion

Does not prevent a director from:
1. acting in accordance with an agreement entered into by the company or from
2. acting in a way authorised by the company’s constitution

Englefield Colliery Co = will breach duty if they make an arrangement with an outsider to vote in the outsider’s interests on a particular transaction

1. agreement voidable
2. account for gains or compensate company for losses.

Question 15

What are 3 guidance examples on the s.173 duty contained in the ICSA ‘Directors’ general duties under the Companies Act 2006’ guidance note?

Answer 15

1. Directors should ensure they don’t allow personal interests to affect the exercise of their independent judgment = excuse themselves if needed
2. Directors can delegate but must do so appropriately and still exercise independent judgment to decide whether to follow the action suggested
3. A director associated with a major shareholder should set any ‘representative’ function aside and make decisions on their own merits

Question 16

What does s.174 CA2006 say?

What is the standard?

What was the standard before (Case)?

What does the subjective element mean?

Answer 16

= directors must exercise reasonable skill care and diligence

= that of a reasonably diligent person with:
• the general knowledge, skill, and experience reasonably expected by a director of the company (objective), and
• the general knowledge, skill, and experience that the director has (subjective)

• Re City Equitable Fire Insurance Co [1925] = subjective only = the skill, care and diligence they have

High skill = higher standard of care

Question 17

In relation to s.174 CA2006, to what extent can directors rely on other company officials?

What must the company prove for legal action against a director to succeed?

What did the case of Re Barings Plc show in relation to breaching this duty?

Describe this case.

Answer 17

• If management appears honest = directors may rely on the information they provide
Not their duty of skill and care to question whether the information is reliable or complete.

• For legal action against a director to succeed a company will have to prove that serious negligence has occurred

• Breach of S.174 if fail to exercise adequate supervision over those performing delegated functions
• Re Barings Plc = Chairman Tuckey was responsible for supervision over Leeson but failed to exercise this adequately = he did not have sufficient knowledge of the nature of the markets and risks involved so was unable to properly consider matters

Question 18

What does s.175 CA2006 say?

What does it particularly apply to?

Which transactions does it apply to?

When does it not apply? (2)

What are the consequences/remedies for a breach?

Answer 18

= directors must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company

• Applies particularly to the exploitation of any property, information, or opportunity irrespective of whether the company could take advantage or not

Only applies to transactions with 3rd parties.

Does not apply:
1. if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest
2. to a conflict of interest arising in relation to a transaction or arrangement with the company in which a director has an interest

Consequences:
1. account for gains
2. A 3rd party acquiring company property through a breach holds that property as a trustee and can be forced to return it

Question 19

Under s.175 CA2006, when would an irreconcilable conflict of interest arise? Why?

What can’t conflicted directors do?

What happens if there are not enough non-conflicting directors to make a decision?

Answer 19

• Irreconcilable conflicts of interest would arise if a director of a competitor joined the board = business opportunities could be viewed as a diversion of an opportunity from the other company

• Directors who are conflicted in this regard cannot count towards the quorum at the meeting on the matter and cannot vote at it = if do vote, must be ignored

• If not enough non-conflicting directors to make a decision = only members will be able to authorise conflict

Question 20

How can an actual or potential conflict of interest under s.175 CA2006 be managed? (2)

How long will authorisation last?

What is the effect of authorisation?

Answer 20

1. Shareholders authorise it via ordinary resolution
2. Directors authorise it via a majority vote, so long as they are not themselves interested in the matter
   a. Can only do this in a Plc if articles allow
   b. Can do this in a Ltd unless articles prevent

• Authorisation will last indefinitely if the facts and circumstances surrounding the conflict stay the same
If facts change, = new authorisation is needed

Effect = director can’t be sued

Question 21

What should Boards do to manage conflicts of interest under s.175 CA2006?

Give 3 examples.

Answer 21

Board should consider introducing a procedure for dealing with conflicts of interest:
1. During induction cosec provide new directors with a briefing on s.175 and requirements prior to authorisation
2. Advise directors they may need to take independent legal advice if a direct conflict arises
3. Consider appointing a committee to review conflict authorisations

Question 22

What does s.176 CA2006 say?

Which other duties may it link to? (3)

Describe the case of Boston Deep Sea Fishing and Ice Co Ltd v Ansel.

Answer 22

= directors must not accept any benefit from 3rd parties, whether conferred by a reason of them being a director or them doing (or not doing) anything as director

1. S.175 = accepting benefits may create a conflict of interest
2. S.173 = accepting may compromise their independent judgement
3. S.172 = accepting may mean not acting in best interests of the company

Boston Deep Sea Fishing and Ice Co Ltd v Ansell = accepted a bribe in return for awarding a contract to a supplier

Question 23

When will the S.176 CA2006 not be infringed?

What is this influenced by?

What did the Bribery Act 2010 introduce?

How can a company avoid prosecutions under Bribery Act 2010?

Name 2 examples.

Answer 23

• Duty will not be infringed if the acceptance of a benefit cannot reasonably be regarded as likely to give rise to a conflict of interest

Influenced by the policies which the company adopts for the purposes of compliance with the Bribery Act 2010 (director’s responsible for this)

• Bribery Act 2010 = giving or accepting bribes is illegal and introduced a corporate offence of failing to prevent bribery

• if it can show that it had ‘adequate procedures’ in place to combat bribery
e.g. (1) require directors to obtain clearance before accepting any benefits (2) require all instances of gifts to be recorded in a register

Question 24

What does s.177 CA2006 say?

What does s.182 CA2006 say?

What are the remedies of each?

Answer 24

S.177 = directors have a duty to declare any interests that they have in any proposed transaction or arrangement with the company
Remedy = civil only = transaction voidable

S.182 = directors have a duty to declare any interests that they have in any existing transaction or arrangement with the company
Remedy = criminal = up to £5,000 fine

Question 25

What 3 circumstances does s.177 CA2006 apply in?

Answer 25

1. When the director contracts with the company (also if director of both boards)
2. where company A contracts with company B and the person is a director of A and a shareholder of B
3. Company A contracts with a connected person of the director (s.252)

Question 26

Why are directors required to disclose their interests in proposed transactions under s.177 CA2006? (2)

What do listed company AoA state the default position is on point 2?

Answer 26

1. to ensure that the other directors are aware of that interest before entering into that transaction or arrangement; and
2. to ensure that the chair is able to rule on whether the director can participate in the decision on that matter = rules usually contained in AoA

Listed company articles state that the default position = interested directors cannot vote or count towards quorum

Question 27

Under s.177 CA2006, how can declaration be given? (3)

In what 4 circumstances are directors not required to declare an interest?

Answer 27

Declaration can be made at a director meeting, by general notice to the company, or written notice to other directors

No need to declare an interest if:
1. It cannot reasonably be regarded as likely to give rise to a conflict of interest
2. The other directors are already aware of it
3. It concerns the terms of their service contract
4. There are no other directors

Question 28

Why are directors required to disclose their interests in existing transactions under s.182 CA2006?

Answer 28

they might otherwise be able to influence the continuation or management of that contract or arrangement

Question 29

Who can bring an action for a breach of directors’ duties?

When can it be brought?

Answer 29

Shareholders through a derivate action under s.260 CA2006.

• Derivative action can only be brought in relation to an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director

Question 30

What is fraudulent trading?

What is wrongful trading?

What is the defence for wrongful trading?

What is the remedy for both?

Answer 30

• S.213 IA1986 = Fraudulent trading = where the directors have acted with intent to defraud creditors
Criminal offence under s.993 CA2006

• S.214 IA1986 = Wrongful trading = where the directors allowed the company to continue trading when they knew (or ought to have known) that there was no reasonable prospect that the company could avoid insolvent liquidation

Defence = took every reasonable step to minimise the potential loss to creditors

Director may be required to contribute to the assets of the company

Question 31

Can companies indemnify directors from liability for a breach of duty?
What does s.233 CA2006 allow companies to do?

Answer 31

S.232 CA2006 = any provision that purports to indemnify a director from any liability for negligence, default, breach of duty or breach of trust is void

S.233 CA2006 = authorises companies to take out and maintain insurance policies on the directors’ behalf