Directors' duties and responsibilities

Question 1

What is a director?

Answer 1

Any person occupying the position of a director, by whatever name called.

Question 2

What is a de jure director?

Answer 2

Someone who has been validly appointed at law. A private limited company must have at least one director and a public limited company must have at least two.

Question 3

What is a de facto director?

Answer 3

Someone who assumes to act as a director but has in fact not been validly appointed.

Question 4

What is a shadow director?

Answer 4

Someone who has a significant amount of influence over a company’s affairs, even though they are not formally appointed as a director.

Someone who the directors of a company act in accordance with.

Question 5

What is an executive director?

Answer 5

Appointed to executive office. Spend the majority of their time working on the business and will be both an officer/employee of the company e.g. Finance Director, HR Director.

Question 6

What is a non-executive director?

Answer 6

An officer of the company but not an employee. Do not take part in the day-to-day running of the company and generally provide independent guidance and advice to the board.

Question 7

What is an alternate director?

Answer 7

Someone who takes the place of a director where one or more directors are absent.

Question 8

How may companies with MA appoint a director?

Answer 8

-By an OR of the shareholders

-By a majority decision of the directors

Question 9

What is a directors service contract and where must they be held?

Answer 9

A written contract of employment setting out the terms and conditions of employment.

Companies have an obligation to keep its directors’ service contract at its registered office for inspection by the members.

Question 10

How long must a directors service contract be kept from the date of termination or expiry of the contract?

Answer 10

A company must keep a copy of all directors’ service contracts at the company’s registered office for a period of at least one year from the date of termination or expiry of the contract for the members to inspect.

Question 11

What are Forms AP01 and AP03 used for?

Answer 11

Form AP01-appointment of director

Form AP03-appointment of secretary

Question 12

What information must a company’s register of directors contain in the case of an individual?

Answer 12

(a) name and any former name
(b) a service address
(c) country/state they reside in
(d) nationality
(e) business occupation
(f) date of birth

Question 13

What information must a company’s register of secretaries contain in the case of an individual?

Answer 13

(a) name and any former name
(b) address

Question 14

What information is required in respect of directors remuneration in the company’s annual accounts?

Answer 14

-directors’ salaries, bonuses and pension entitlements; and

-compensation paid to directors and past directors for loss of office

Question 15

What resolution is required for shareholders to remove a director and what notice is required?

Answer 15

Under s168(1) CA 2006, the shareholders may by ordinary resolution remove a director before the expiration of their period of office.

Under s168(1) CA 2006, special notice of 28 days is required of a removal resolution.

The Articles must specifically provide for the Board to remove a director.

Question 16

Are directors who are also shareholders allowed to vote in their capacity as a shareholder on the OR to remove them?

Answer 16

Yes, this is allowed.

Question 17

What is Form TM01 used for?

Answer 17

When a director leaves office, the company must update the company’s register of directors and also give notice to Companies House by filing Form TM01.

Question 18

Describe the S171 director duty to act within powers.

Answer 18

-Duty act within the company’s constitution

-Duty to exercise powers for the purposes for which they are conferred

Question 19

Describe the S172 director duty to promote the success of the company for the benefit of the members as a whole.

Answer 19

A director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole.

Success should normally mean a ‘long-term increase in value’.

Question 20

Describe the S173 director duty to exercise independent judgment.

Answer 20

This duty codifies the principle that directors must exercise their powers independently, and not fetter their discretion. They can rely on advice from others but must make their own individual judgments.

Question 21

Describe the S174 director duty to exercise reasonable care, skill and diligence.

Answer 21

The level of care, skill and diligence which a director must exercise is assessed objectively and subjectively.

The minimum standard expected of a director is that objectively expected of a director in that position. This standard may be subjectively raised if the particular director has any special knowledge, skill and experience.

Question 22

Describe the S175 director duty to avoid conflicts of interest.

Answer 22

This duty requires a director to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

Question 23

Describe the S176 director duty to not accept benefits from third parties.

Answer 23

Under this duty, a director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing/not doing anything as a director.

Question 24

Describe the S177 director duty to declare any interest in a proposed transaction.

Answer 24

Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors before the transaction is entered into.

Question 25

When does a director not need to make a declaration pursuant to S177CA 2006?

Answer 25

-When the director is not aware of the interest, transaction or arrangement in question.

-The interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about it.

-If the conflict arises because it concerns their service contract and their service contract has been considered by the board.

Question 26

Describe the S182 duty to disclose interests in existing transactions.

Answer 26

Directors are also required to disclose interests in existing transactions or arrangements entered into by the company.

Question 27

Can a director who is interested in a transaction/arrangement with the company vote or count in the quorum for BRs in respect of that transaction/arrangement?

Answer 27

No, unless:

-the company disapplies this rule each time the conflict arises by OR

-the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest

-the director’s conflict arises from a permitted cause

Question 28

What is the remedy for a breach of the S174 duty to take reasonable care, skill and diligence?

Answer 28

Damages.

Question 29

What are the remedies for breach of duties other than the S174 duty?

Answer 29

Remedies for breach of duties other than s174 include injunction, setting aside, restitution, restoration and damages.

Question 30

What kind of approval/resolution is required for a director’s service contract for a guaranteed period in excess of two years?

Answer 30

Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years.

Question 31

What are the consequences of a company agreeing to a provision in a service contract in contravention of S1882 CA 2006?

Answer 31

The provision will be void to the extent of the contravention under s189 CA 2006, and

the contract will be deemed to contain a term entitling the company to terminate it any time by the giving of reasonable notice.

Question 32

Where the OR for a directors proposed service contract is to be passed at a GM, what is the procedure required?

Answer 32

s188(5)(b) CA 2006 sets out that a memorandum setting out the proposed contract must be made available for inspection by members both:

a) at the company’s registered office for not less than 15 days ending with the date of the meeting

b) at the meeting itself.

A minimum of 15 days’ notice of the GM held to approve the contract will therefore have to be given to shareholders unless the written resolution procedure is used in which case the proposed contract must be sent to every eligible member at the same time as the proposed resolution.

Question 33

What is a substantial property transaction under S190 CA 2006?

Answer 33

Section 190 CA 2006 governs an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.

Question 34

What kind of approval is required for substantial property transactions?

Answer 34

Shareholder approval by ordinary resolution.

Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.

Question 35

What is the definition of a substantial asset under S190 CA 2006?

Answer 35

An asset worth more than £100,000.

An asset worth between £5,000-£100,000 will only be a substantial asset if it is worth more than 10% of the company’s net asset value.

Question 36

If a company is only recently incorporated, what is held to be their net asset value?

Answer 36

The amount of the company’s called up share capital.

Question 37

What are the key categories of connected persons?

Answer 37

1. Members of the director’s family: spouse/civil partner, parents, children. Anyone else does not count
2. Companies in which the director and others connected with them hold 20% or more of the shares
3. A business partner of the director or those connected with them
4. Trustees of a trust the beneficiaries of which include the director or those connected with them

Question 38

If a transaction is between a company and a director of the company’s holding company/connected person, what approval is required?

Answer 38

Section 190(2) CA 2006 states that if the transaction is between a company and a director of the company’s holding company/connected person, the holding company will also need to approve the transaction by ordinary resolution.

Question 39

Where a substantial property transaction is entered into without shareholder approval, what remedy is available?

Answer 39

The transaction is voidable at the instance of the company unless:

(a) restitution is no longer possible
(b) the company has been indemnified for the loss/damage suffered
(c) rights acquired in good faith by third party would be affected by the avoidance

Question 40

What defence is available to a breach of substantial property transactions under S190 CA 2006?

Answer 40

If the substantial property transaction is between a company and a person connected with a director, and the director concerned shows that they took all reasonable steps to ensure the company’s compliance with s190 CA 2006, the director will not be liable under s195(6) CA 2006.

Question 41

What approval is required for loans, guarantees or security for directors?

Answer 41

Shareholder approval via ordinary resolution. These are the only transactions that require approval for private companies with no association to a Plc.

Question 42

What kind of transactions require shareholder approval for public companies and private companies associated with public companies?

Answer 42

These companies also require shareholder approval for:

-Loans to a person connected to a director of the company or a director of its holding company (s200);

-Quasi-loans (s198) to, or credit transactions (s201) with their directors and the directors of a holding company or persons connected with such directors; and

-Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors (s197, 198. 200, 201).

Question 43

What are the exceptions to the requirement for shareholder approval for loans, quasi-loans and credit transactions?

Answer 43

Section 204: Expenditure on company business (up to a maximum of £50,000);

Section 205: Loans for defending proceedings brought against a director;

Section 206: Loans for defending regulatory actions or investigations;

Section 207: Minor and business transactions-loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;

Section 208: Intra group transactions, and

Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).

Question 44

Where a loan/related transaction with a director is entered into without shareholder approval, what remedy is available?

Answer 44

The arrangement is voidable at the instance of the company unless:

(a) restitution is no longer possible
(b) the company has been indemnified for the loss/damage suffered
(c) rights acquired in good faith by third party would be affected by the avoidance

Question 45

What defence is available to a breach of loans/related transactions with directors under S200 CA 2006?

Answer 45

If a transaction contravenes s200,201 or 203 CA 2006 and is entered into with a person connected with a director, that director will not be liable if they took all reasonable steps to ensure the company’s compliance with those section.

Question 46

Where the OR for a directors loan/related transaction is to be passed at a GM, what is the procedure required?

Answer 46

A memorandum setting out the proposed transaction must be made available for inspection by members both:

a) at the company’s registered office for not less than 15 days ending with the date of the meeting

b at the meeting itself.

A minimum of 15 days’ notice of the GM held to approve the transaction will therefore have to be given to shareholders unless the written resolution procedure is used in which case the proposed contract must be sent to every eligible member at the same time as the proposed resolution.