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Business Law and Practice (V) > Directors' duties and responsibilities > Flashcards

Directors' duties and responsibilities Flashcards

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1
Q

What is the difference between a director and a shareholder?

A
  • Director manages company on day to day (agency) basis and owes duties to the company
  • Shareholder owns (shares in) the company and can control key decisions through shareholder resolutions

Common for them to be the same people

Agency = company is inanimate so directors responsible for managing company through agency relationship

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2
Q

Are directors accountable to the shareholders directly?

A

No - they are accountable to the company itself

So accountable to shareholders but not technically

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3
Q

On what matters can directors make decisions on?

A
  • Any that are not reserved by the CA or Articles for the shareholders (company name, amending Articles, removing directors)
  • Board usually free under Articles to make decisions on behalf of company on all other matters (MA 3): employ/remunerate individuals, enter into contracts, buy and sell company property, borrow from banks, putting together accounts and supplying auditors

MA 5 allows the board to delegate particular decision to one director/committee e.g. HR director is delegated decision-making re HR decisions of company

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4
Q

How are directors held to account?

A

Actions and powers regulated by statute to ensure companies are run for the benefit of shareholders

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5
Q

What is the minimum number of directors for a company?

A
  • Ltd = at least 1 director
  • Plc = at least 2 directors

No maximum - can be inserted into Articles

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6
Q

Must every director be a natural person?

A

A company can be appointed as a director, but every company must have at least one director who is a natural person so can aid accountability

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7
Q

How old must you be to be a director?

A

16

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8
Q

What is the difference between a de facto and a de jure director?

A
  • De jure = validly appointed at law
  • De facto = someone who assumes to act as director but has not been validly appointed
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9
Q

What applies to de facto the same way as it does de jure?

A

Fiduciary duties and liabilities

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10
Q

What is a shadow director (and what will not be a shadow director)? Will CA and IA provisions apply equally to them?

A
  • A person in accordance with whose directions or instructions the directors of the company are accustomed to act
  • Professional advisors will not be shadow directors (accountants etc.)
  • Most provisions in CA and IA apply equally to shadow directors

Legislation designed to ensure anyone acting as a director - even if not technically one e.g. a friend of director giving advice from ‘behind scenes’ which directors follow - is subject to duties/restrictions applying to all directors

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11
Q

What is the difference between an executive and non-executive director?

A
  • Executive = appointed to office and spends majority/all working time on business as officer/employee
  • Non-executive = not employee and does not take part in day-to-day running but provides independent advice
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12
Q

What are alternate directors and will duties apply to them?

A
  • Individual who will take place of director when one or more is absent and has their voting powers (fellow director/someone appointed by BR)
  • Is considered duties will apply

Becoming increasingly rare due to technology and written resolutions

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13
Q

What does a company secretary do and not do?

A
  • Does: keep company books up-to-date, produce minutes, make filings at CH
  • Does not: take decisions on behalf of company (that is director and shareholder domain)
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14
Q

What are the requirements for a secretary for a Plc and Ltd?

A
  • Plc = must have company secretary
  • Ltd = not required to have company secretary unless required by articles

If Ltd has no secretary, director/authorised person can carry out roles

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15
Q

How qualified must the company secretary be?

A

Must have the requisite knowledge and experience and one of the qualifications set out in s273(2)

Responsibility of directors to check qualifications

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16
Q

What is the procedure for the appointment of directors in the CA 2006?

A

There is not one! Governed by the Articles

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17
Q

What are the two ways companies can appoint a director under the MA?

(Model Articles)

A
  1. By OR of shareholders; or
  2. By a decision of the directors (majority)

Second is easier

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18
Q

Is an executive director an employee of the company? Do they have an automatic entitlement to be paid?

A
  • Are an employee - sign a ‘service contract’ containing terms/conditions of employment, remuneration, notice provisions etc. (determined by board)
  • No automatic entitlement to be paid (determined subject to Articles)
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19
Q

What obligations does a company have re its service contracts?

A

Keep at registered office for inspection by members

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20
Q

What approval is required of a director’s service contract?

A
  • Will generally only require approval of BR
  • Shareholder approval required for long-term service contracts
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21
Q

What must be maintained at registered office and what must CH Registrar be notified of?

A
  • Must maintain register of directors and secretary at registered office
  • Must notify Registrar at CH of changes to directors
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22
Q

What information about directors is available for inspection by the public and its members?

A
  • Information at CH available for inspection by the public
  • Register at registered office available for inspection on request by any member of company without charge and by any other person (public) on payment of a fee
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23
Q

When can a company refuse the request from public/member to inspect information e.g. register of members?

A

If they believe the request is not made for a ‘proper purpose’

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24
Q

If the company believes the request is not for proper purpose, what should they do?

A

Apply to court to refuse request within 5 working days of receiveing it and notify the person making the request

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25
Q

What address of the director’s will be available for the public generally in the register?

A

Only a service address - either director’s residential address or company’s registered office

Individual directors (not secretaries) still have to provide residential address (s165) but this is kept on a secure register not open to public inspection

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26
Q

What disclosure re (past) director’s remuneration is required on company’s annual accounts?

A
  • Director’s salaries, bonus payments and pension entitlements
  • Compensation paid to directors and past directors for loss of office
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27
Q

What other payments to/received by whom must be disclosed on annual accounts?

Two types

A

Payments made to/received by:

  • Person connected to a director or
  • Body corporate controlled by director
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28
Q

How is a director removed by shareholders? Can the board remove?

A
  • By OR
  • Board cannot remove unless Articles provide
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29
Q

What notice is required for a removal resolution?

A

Special notice - 28 days

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30
Q

Can directors vote in the OR to remove them?

A

Yes!

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31
Q

What are the other ways a director may vacate from office?

A
  • Resignation by notice (+ non-obligatory BR accepting resignation)
  • Automatic termination (disqualified, bankrupt, physically/mentally incapable and will remain so for 3+ months)
  • Disqualification w/o leave of court (for fraudulent/wrongful trading, persistent breaches of company law)
  • Retirement by rotation
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32
Q

What is the maximum disqualification period?

A

15 years

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33
Q

What is retirement and reappointment and which articles is it required by?

As part of retirement by rotation

A

MA for plcs - require retirement and reappointment of directors by members every 3 years (all directors of listed companies subject to annual re-election)

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34
Q

What must happen at CH when director leaves office?

A

Update company’s register of directors and give notice to CH by filing form TM01

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35
Q

What kind of directors are subject to directors’ duties (s170-177)?

A

All

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36
Q

If a directors’ duty is breached, who is the C?

A

The company! As a wrong has been done to the company

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37
Q

What are the 7 general duties of directors?

A
  1. Duty to act within powers (s171)
  2. Duty to promote success of company for benefit of members as a whole (s172)
  3. Duty to exercise independent judgement (s173)
  4. Duty to exercise reasonable care, skill and diligence (s174)
  5. Duty to avoid conflicts of interest (s175)
  6. Duty not to accept benefits from TPs (s176)
  7. Duty to declare interest in a proposed transaction (s177)
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38
Q

What are the 2 separate duties within the duty to act within powers?

S171

A
  1. Act within company’s constitution (in accordance with articles e.g. not borrow more than articles allow w/o shareholder approval)
  2. Exercise powers for purposes for which they are conferred (not for personal gain)
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39
Q

What is meant by the duty requiring directors to act in the ‘best interests’ of the company?

S172

A

Must act in a way which they consider, in good faith, is most likely to promote benefit of its members as a whole; i.e. long-term increase in value

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40
Q

What are the non-exhaustive and often conflicting matters included under s172 and how do they compare to duty to shareholders?

A
  • Is secondary to shareholders - but considered as part of ‘enlightened shareholder value’ (balance between maximising shareholder profits and wider stakeholder interests)
  • List includes: likely long-term consequences of any decision; employees’ interests; the need to foster relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company’s maintaining a reputation for high standards of business conduct; the need to act fairly as between the members of a company

Common sense approach usually taken - minutes should show consideration has been given to s172 duty when taking decisions

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41
Q

Does the duty to exercise independent judgement mean that they cannot rely on advice from others to make own judgements?

S173

A

Can rely on advice of others but must make own judgements; cannot blindly follow others without considering interests of the company

Should not fetter discretion

42
Q

What is the 2-part test for reasonable level of care, skill and diligence?

S174

A

Required level of care, skill diligence is that which would be exercised by a reasonably diligent person with:

  1. The general knowledge, skill and experience that may reasonably be expected of someone in their role; (objective) and
  2. The general knowledge, skill and experience of that director (subjective)
43
Q

Re the duty to avoid conflict of interests, will it be an excuse for the director to say the opportunity is not one which the company could have exploited itself?

S175

A

No excuse! It is widely drafted and requires a director to avoid situation in which they (can) have a direct/indirect interest that (possibly) conflicts with interests of company

44
Q

In what 3 circumstances will the duty to avoid conflicts of interests not be infringed?

S175

A
  1. If situation cannot reasonably be regarded as likely to give rise to conflict of interest
  2. If conflict arises re a transaction with the company which is subject to duty of disclosure
  3. If conflict arises re matter which has been authorised by directors

For 2: E.g. X is a director of Company A and a director of Company B (after approval by the Board of Company A). If Company B, at some point later, wish to sell an asset (eg a property) to Company A that is a s 175(3) CA 2006 situation which is an exception from the duty under s 175 CA 200

45
Q

In what circumstances can a director not accept benefits from TPs?

S176

A

Where benefits are conferred by reason of them being a director/doing or not doing something as director

Not breached if acceptance cannot be regarded as likely to give rise to conflict

46
Q

Can directors authorise another director to receive a benefit from a TP? (as they can do re conflicts of interest)

S176

A

No! But can ratify

47
Q

What level of interest is required for it to be deemed that a director has an indirect interest which they need to declare?

S177

A

Where they have some interest - through spouse/relative/company in which they are a member

48
Q

When should interest be declared?

S177

A
  • Before transaction entered (subject to Articles)
  • Can be at BM, writing in advance of meeting, or a one-off general notice of interest
49
Q

What is the effect of a director giving a ‘general notice’?

A

They are always considered interested in any transaction/arrangement with specified party

I.e. director has interest in company or connected to specified person

50
Q

When does a director not need to make a declaration (of interest in a proposed transaction)?

S177

4

A
  1. Not aware of interest (and not ought reasonably have been); or
  2. Interest not reasonably regarded as likely to give rise to conflict of interest; or
  3. Other directors (ought to) know about conflict
  4. Conflict arises because of service contract which has been considered by board

In practice directors will likely continue to declare interests even if other directors (ought to) know about any conflict - can easily be documented and avoids need of having to rely on exception that may not apply

51
Q

What do the MA not allow a director who is interested in a transaction/arrangement to do?

S177

A

Vote or count in the quorum for BR in respect of that transaction or arrangement

52
Q

Can company disapply the MA restriction that applies to a director voting/counting in quorum for BR about transaction in which they are interested? When else will the restriction disapply?

A
  • Yes by OR
  • Director’s interest cannot reasonably be regarded as likely to give rise to conflict of interest
  • Director’s conflict arises from permitted cause
53
Q

Who has a claim against the director if they breach their duties?

A

The company

54
Q

What 5 remedies are available for all sections?

A
  • Injunction
  • Setting aside transaction
  • Restitution and account of profits
  • Restoration of company property
  • Damages
55
Q

What is the only remedy available for a breach of duty of care, skill and diligence (s174)?

A

Damages

56
Q

In what circumstances can shareholders approve a director’s proposed actions in advance even though it would breach general duties under s171-177?

A

Where there has been full disclosure by directors so that shareholders are properly aware of details and can make an informed decision

57
Q

What conduct of a director can shareholders ratify (approve after breach) and how do they do this?

A
  • Negligence, default, breach of duty and breach of trust
  • Can ratify by OR
58
Q

What happens to the votes attached to the shares held by the director who is the subject of ratification?

A

Votes attaching to their shares will be disregarded

59
Q

What 2 things cannot be ratified?

A
  • Unlawful acts (e.g. declaring dividend where no distributable profits available)
  • A breach in insolvency situations (directors owe duties to creditors once insolvent, not shareholders)
60
Q

What 3 types of transaction between the company and its directors (or people connected to them) are regulated by the CA 2006 requiring approval of company shareholders?

A
  1. Directors’ long-term service contracts
  2. Substantial property transactions
  3. Loans, quasi-loans and credit transactions

No approval = not valid

61
Q

Do the 3 types of transactions requiring shareholder approval (long-term service contract, substantial property transactions, and loans etc.) only include directors of that company?

A

No, also cover directors of that company’s holding company (and connections to them)

E.g. DEF is a subsidiary of ABC. a director of ABC wants to enter into a substantial property transaction with DEF = shareholder approval required from DEF (and ABC!)

62
Q

What is a long-term service contract and how must it be approved?

A
  • A director’s service contract with a guaranteed term which is (or may be) longer than 2 years
  • Must be approved by an OR
63
Q

What is the ‘guaranteed term’ of a service contract?

If (may be) longer than 2 years = long-term service contract = needs OR

A

Guaranteed term is either…

  1. Period during which contract continues other than instance of the company and during this time company cannot terminate contract or can only terminate in certain circumstances; or
  2. The period of notice required to be given by the company (where employment can be terminated by company notice)

E.g. for 2: draft contract with a term of 1 year with option for director to renew for further 2 years has clause allowing company to terminate contract at any time on giving 3 months notice - guaranteed term = 3 months

64
Q

Will the guaranteed term apply to an aggregate of periods?

A

Yes - e.g a company is unable to terminate a director’s service contract for the first 18 months of the term (1) and thereafter has to give a minimum of nine months’ notice to terminate (2) = contract will fall within s 188(3) because the aggregate period of the two provisions is in excess of two years

65
Q

What must be done if the director is also a director of any holding company?

A

The shareholders of the holding company will also need to give approval

E.g. DEF is a subsidiary of ABC. DEF wants to give a long-term service contract to X, who is already a director of ABC. Both ABC and DEF need approval from their shareholders

66
Q

If an OR is not used to approve a long-term service contract, what does this make the provision and what is the contract deemed to contain?

A
  1. Provision void to extent of contravention (i.e. max 2 years); and
  2. Contract deemed to contain a term entitling company to terminate it at any time by giving reasonable notice
67
Q

When will approval not be required by the members of any company even if the guaranteed term is over 2 years?

A

Where the company is a wholly-owned subsidiary of another company (even if guaranteed term over 2 years!)

I.e. a wholly owned subsidiary is proposing a service contract with a guaranteed term of 2+ years - approval not required from members of wholly owned subsidiary (but obviously will be from parent)

68
Q

Will a director be permitted to vote/count in quorum of BR re contract?

A

No!

69
Q

What rights of inspection do members have re all director’s service contracts from termination/expiry and is this conditional on length/conditions of contract?

A
  • Contracts must be kept at company’s registered office for at least one year from date of termination/expiry for members to inspect without charge
  • Obligation to do applies regardless of length and whether or not it is terminable within 12 months
70
Q

If the OR re long-term service contract is to be passed at a GM, where must a memorandum setting out the proposed contract be made available for inspection by members and in what time?

A
  • At registered office for not less than 15 days ending with the date of the meeting; and
  • At the meeting itself
71
Q

How many days notice of GM to approve contract have to be given to shareholders? Will this be the same for short notice procedure?

A
  • 15 days (as the contract must be available for inspection for this long)
  • 15 days also applies even if short notice procedure followed
72
Q

How is the procedure for approving a long-term service contract different where a written resolution is used?

A
  • There is no 15-day requirement for written resolution
  • Memorandum setting out proposed contract must be sent/submitted to all eligible members at/before time at which proposed resolution is sent/submitted to member
73
Q

What kind of transactions do substantial property transactions concern and how are they permitted?

A
  • Acquisitions/disposals by a director or holding company director (or connected person) of a substantial non-cash asset to or from the company
  • Permitted by OR

Non-cash asset = any property other than cash

74
Q

Must approval be given before or after for a substantial property transaction?

A

Either…

  • Before transaction entered into; or
  • After, provided transaction made conditional on approval being obtained
75
Q

When will a non-cash asset be ‘substantial’ and when will it not be?

A
  • £5,000 or less = not substantial
  • £100,000 or more = substantial
76
Q

When will a non-cash asset be substantial if worth more than £5,000 but not more than £100,000?

A

Where it is worth more than 10% of company’s net asset value (as per most recent statutory accounts)

If no accounts prepared - net asset value = company’s called up share capital

77
Q

Who counts as a ‘connected person’?

I.e. subject to rules on substantial property transactions

4 types

A
  • Members of director’s family (only partner, [step-]children, and parents)
  • Companies in which the director (and others connected with them) holds 20% of more of shares
  • Business partner of director (or those connected with them)
  • Ts of a trust the Bs of which include the director (or those connected with them)
78
Q

If the transaction is between a company and a director (or person connected to them) of the company’s holding company, will the holding company also need to approve of the transaction by OR?

A

Yes - but if the subsidiary is wholly-owned, approval is not required from that subsidiary’s members (but will be from parent)

E.g. ABC Ltd proposing to buy some equipment from father of one of its directors. ABC has single shareholder (DEF Ltd). Director in question is also a director of DEF = shareholder approval needed by OR from shareholders of DEF only (ABC is a wholly-owned subsidiary)

79
Q

If a director, who is also a shareholder, sells their shares back to the company, is this a substantial property transaction?

A

No

80
Q

Where a substantial property transaction is entered into without shareholder approval, in what 3 circumstances will the transaction not be voidable?

A
  1. Restitution no longer possible;
  2. Company has been indemnified for loss or damage suffered by it; or
  3. Rights acquired in good faith by TP would be affected by the avoidance
81
Q

How and when can the substantial property transaction be affirmed by shareholders?

A

By OR within a reasonable period

82
Q

If the substantial property transaction is not affirmed what 2 things may the directors be liable for?

I.e. what must they do

A
  1. To account to the company for any profits made; and
  2. To indemnify company for any loss incurred
83
Q

What are the 2 defences for a substantial property transaction?

A
  • Director shows they took all reasonable steps to ensure compliance for SPT between company and connected person
  • Connected person and director who authorised transaction can show they had no knowledge of circumstances surrounding constituting contravention
84
Q

What are the obligations of interested directors and is there an exception to this? And what will they not be able to do?

A
  • Disclose nature and extent of interest to board (maybe subject to exception that director not formally delcare if others already aware)
  • Not permitted to vote on BR to approve contract/count in quorum
85
Q

What types of transactions and to whom are covered by the ‘loans to directors’ regulations?

A

To directors, holding company directors and connected persons

  1. Loans (lending money to director)
  2. Quasi-loan (company pays off debt to TP and director will reimburse)
  3. Credit transaction (company provides goods/services on credit basis which [only] director pays for at later date)
  4. Guarantees or the provision of security for any of the above (company stands as guarantor for repayment of loan obtained by director/company provides bank with security over assets)

Whether they apply depend on category of company…

NB remember this applies to directors of a holding company too!

86
Q

What are their different rules for re loans to directors?

A
  1. Private companies (less regulation)
  2. Public companies and private companies associated with public companies (more regulation)

Associated = one is a subsidiary of other or both subsidiaries of same body corporate e.g. a private company that is a subsidiary of a public company will be associated with the public company for these purposes

87
Q

What types of transactions require approval by OR for all companies?

A

Loans and guarantees/security for directors

If company is private company, these are the only transactions for which OR approval is needed! E.g. a quasi-loan (from non-assocated private company) for renovations on a director’s home would not need approval

Loans because most common (so needs protection from all companies) and guarantees because you can guarantee that all companies are going to require approval

88
Q

What types of transactions require OR approval for public companies and private companies associated with public companies?

As well as those requiring approval for all companies

I.e. in addition to loans and guarantees/security for directors

A

Quasi loans and credit transactions

89
Q

What are the exceptions to the requirement of shareholder approval for loans and related transactions?

I.e. what transactions?

A
  • Expenditure on company business (maximum £50k)
  • Loans for defending regulatory actions, investigations, or proceedings brought against director
  • Minor and business transactions
  • Intra group transactions
  • Money lending companies (where loan is made in ordinary course of business of company)
90
Q

For the minor and business transactions exception (for loans and related transactions with directors), what is the limit for loans/quasi-loans and credit transactions that will not require shareholder approval?

A
  • Loans/quasi-loans up to £10,000
  • Credit transactions up to £15,000

Will both not require shareholder approval!

Credit transactions has a higher threshold as less risky

91
Q

If a transaction is entered into without shareholder approval, when will transaction not be voidable?

Re loans and related transactions with directors

Three

A
  1. Restitution no longer possible;
  2. Company has been indemnified for loss or damages suffered by it; or
  3. Rights acquired in good faith by TP would be affected by avoidance
92
Q

How and when can the shareholders affirm the loan/transaction with directors?

Of the company and (where relevant) of the holding company

A

By OR within a reasonable period

Can no longer be avoided if affirmed

93
Q

If the loan/related transaction is not affirmed what 2 things may the directors be liable for?

I.e. what may they have to do

A
  1. To account to the company for any profits made; and
  2. To indemnify company for any loss incurred
94
Q

What are the defences for a loan to director transaction?

A
  • Director shows they took all reasonable steps to ensure compliance for SPT between company and connected person
  • Connected person and director who authorised transaction can show they had no knowledge of circumstances surrounding constituting contravention
95
Q

If the transaction is between a company and a director (or person connected to them) of the company’s holding company, will the holding company also need to approve of the transaction by OR?

A

Yes - but if the subsidiary is wholly-owned, approval is not required from that subsidiary’s members (but will be from parent)

96
Q

What are the obligations of a directors interested in the loan transaction and is there an exception to this? And what will they not be able to do?

A
  • Disclose nature and extent of interest to board (maybe subject to exception that director not formally delcare if others already aware)
  • Not permitted to vote on BR to approve contract/count in quorum
97
Q

If the OR re proposed transaction is to be passed at a GM, where must a memorandum setting out the proposed contract be made available for inspection by members and in what time?

A
  • At registered office for not less than 15 days ending with the date of the meeting; and
  • At the meeting itself
98
Q

How many days notice of GM to approve loan/related transaction have to be given to shareholders? Will this be the same for short notice procedure?

A
  • 15 days (as the contract must be available for inspection for this long)
  • 15 days also applies even if short notice procedure followed
99
Q

How is the procedure for approving a loan/related transaction different where a written resolution is used?

A
  • There is no 15-day requirement for written resolution
  • Memorandum setting out proposed contract must be sent/submitted to all eligible members at/before time at which proposed resolution is sent/submitted to member
100
Q

Summary of the 3 transactions

A

Business Law and Practice (V) (13 decks)

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