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Company Law > Managing companies – Directors and the Board > Flashcards

Managing companies – Directors and the Board Flashcards

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1
Q

What MA article for directors being responsible for management of company’s business?

A

MA 3

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2
Q

What MA article for protection for shareholders from acts of rogue director?

A

MA 4

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3
Q

Section for amendments to articles by special resolution?

A

s21 CA 2–6

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4
Q

3 types of directors at law?

A
  1. De jure
  2. De facto
  3. Shadow
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5
Q

2 types of directors in practice?

A
  1. Executive

2. Non executive

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6
Q

What’s a de jure director?

A

Director who has been validly appointed at law.

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7
Q

What’s a de facto director?

A

Someone who assumes to act as a director but has in fact not been validly appointed.
–>same fiduciary duties and liabilities in insolvency apply to all directors including de facto directors.
The Commissioners for HM Revenue and Customs v Holland (2010):

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8
Q

What’s a shadow director?

A 
s 251 (1) ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’.
--> s251(2); prof advisers not to be considered shadow directors
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9
Q

What’s necessary to prove for shadow director as per Re Hydrodam (Corby) Ltd [1994]?

A
  1. The identity of the formally-appointed directors of the company;
  2. That the person in question directed those formally appointed directors as to how to act in relation to the company’s affairs;
  3. That those directors acted in accordance with that person’s directions, and
  4. That the directors were accustomed to act in that manner.
    - - Question of fact in every case
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10
Q

De facto director vs shadow director?

A

A de facto director is a person who assumes to act as a director.
A shadow director, by contrast, does not claim or purport to act as a director. On the contrary, he claims not to be a director.

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11
Q

Executive directors?

A

An executive director is a director who has been appointed to executive office. Majority if not all working time on business.

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12
Q

Non-executive directors?

A

A non-executive director is also an officer of the company, but will not be an employee of the company. Do not take part in day-to-day.

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13
Q

Alternate directors?

A

However, some companies in their articles provide for alternate directors to take the place of a director where one or more directors are absent.
– Quite rare - not in MA, modern times board meetings can be held on phone etc.

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14
Q

Does the CA 2006 stipulate procedure for appointment of directors?

A

No - MA 19(1):

(a) by ordinary resolution (of the shareholders), or
(b) by a decision of the directors.’

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15
Q

Sections for service contracts?

A

s 228 CA 2006 - copy of all directors’ service contracts
s 229 - shareholders have right to inspect directors’ service contracts

s188 - Long-term service contract i.e. longer than 2 years

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16
Q

Termination of appointment ways? (3)

A
  1. Resignation - subject to Articles
  2. Vacation - MA 18
  3. Removal - s 168 CA 2006 - ordinary resolution; written resolutions cannot be used; special notice of resolution required - 28 clear days ahead of GM.
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17
Q

What’s a ‘Bushell v Faith’ clause?

A

Give weighted voting rights allowing director/shareholders to block such resolutions.
–> seems to contradict s168; but it doesn’t - requirement for ordinary res is not changed, but way votes are amassed makes it easier for director to survive. Matter for internal management.

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18
Q

Under what act can a director be disqualified?

A

Company Directors Disqualification Act 1986 (CDDA 1986) - disqualification in certain circumstances.

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19
Q

Two types of discretionary orders?

A
  1. Mandatory: 2-15 years - s6(1) CDDA: director has abused privilege of limited liability in some way.
    Secretary of Trade and Industry v Blunt (2005)
  2. Discretionary: grounds include:
    - conviction re. management
    - persistent breaches of company legislation
    - fraud
    - disqualification after investigation of the company
    Secretary of State for Business, Innovation and Skills v Pawson (2015)
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20
Q

Criminal penalties, compensation orders and disqualification undertakings?

A
  1. Criminal penalties - s 13 and s 15
  2. Compensation orders - s15A-15C
  3. Disqualification undertakings - s6(2)
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21
Q

What sections for directors duties?

A

ss 171-177

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22
Q

Who would be the claimant in proceedings against a director?

A

The company - s170(1) - duties are owed to COMPANY and not to shareholders

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23
Q

Can liability for breach by director be avoided?

A

YES if director’s conduct capable of approval/ratification by shareholders –> s239.

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24
Q

Section to amend articles?

A

s 21 CA 2006

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25
Q

What’s the Foss v Harbottle (1843) principle?

A

Directors owe their duties to the company - s170(1) gives statutory effect to this principle.

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26
Q

Can the directors ever be found to owe duties to shareholders?

A 
"something over and above the usual relationship that any director of a company has with its shareholders" eg where there is a special relationship between the directors and shareholders arising usually from a personal relationship and the shareholders place trust and confidence in
the directors (Sharp v Blank [2015]).
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27
Q

What’s the overriding principle of the equitable fiduciary duties?

A

Fiduciaries (agents) must not benefit from their position of trust.
Towers v Premier Waste Management Ltd [2012]

28
Q

Prior to CA 2006: common law (1) and fiduciary/equity (6) duties?

A
  1. • Common law duty of skill and care;
  2. • duty to act bona fide in the best interests of the company;
  3. • duty to act within powers and for proper purposes
  4. • duty not to misapply company property;
  5. • duty to account for a secret profit
  6. • duty to avoid conflicting interests and duties
  7. • duty not to fetter discretion.
29
Q

What are the general duties as per ss 171 - 177? (7)

A
  1. Duty to act within powers (s 171);
  2. Duty to promote the success of the company for the benefit of the members as a whole (s 172);
  3. Duty to exercise independent judgment (s 173);
  4. Duty to exercise reasonable care, skill and diligence (s 174);
  5. Duty to avoid conflicts of interest (s 175);
  6. Duty not to accept benefits from third parties (s 176); and
  7. Duty to declare any interest in a proposed transaction (s 177).
30
Q

What’s s 171? 2 subsections?

A

Duty to act within powers:

(a) act in accordance with the company’s constitution
(b) only exercise powers for the purposes for which they are conferred - bona fide what they consider - not the court - in the best interest of the company

31
Q

What’s the proper purposes doctrine? Under what section? What case for the objective test?

A

s 171(b): has often been challenged re. power to issue shares.

Extrasure Travel Insurances Ltd v Scattergood [2003]

  1. Identify the power whose exercise is in question;
  2. Identify the proper purpose for which that power was delegated to the directors;
  3. Identify the substantial purpose for which the power was in fact exercised; and
  4. Decide whether that purpose was proper.

Other cases:
Howard Smith Ltd v Ampol Petroleum Ltd [1974]
Eclairs Group Ltd v JKX Oil & Gas plc [2015]

32
Q

What’s s 172? 6 subsections under (1)?

A

Duty to promote the success of the company:

(1) good faith - promote success of company - have regard to:
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationship with suppliers, customers, and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.

33
Q

Case for test for determining duty under s 172?

A

Charterbridge Corpn Ltd v Lloyd’s Bank Ltd (1970)
“whether an intelligent and honest man in the position of a director of the company concerned, could, in the whole of the existing circumstances, have reasonably believed that the transactions were for the benefit of the company.”

34
Q

What happens to s 172 duty to promote success of the company where the company is insolvent?

A

Duty extends to the directors acting in the best interests of the CREDITORS of a company.
Winkworth v Edward Baron Development Co Ltd [1986]
Re HLC Environmental Projects Ltd [2013]

35
Q

What’s s 173? 2 subsections?

A

Duty to exercise independent judgment:

(1) A director of a company must exercise independent judgment.
(2) This duty is not infringed by his acting –
(a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or
(b) in a way authorised by the company’s constitution.

36
Q

Case for best interest under s 173?

A

If best interests of the company to enter into an agreement which fetters the discretion of the directors, this will not be a breach of s 173.

Fulham Football Club Ltd v Cabra Estates plc [1994]

37
Q

What’s s 174 2 subsections?

A

Duty to exercise reasonable care, skill and diligence:

(1) A director of a company must exercise reasonable care, skill and diligence.
(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with-
(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and
(b) the general knowledge, skill and experience that the director has.

38
Q

Landmark case for s 174 ‘duty of care based on reasonable foresight’?

A

Donoghue v Stevenson (1932)

The provisions of s 174 adopt this subjective / objective test. The minimum standard expected of a director is that objectively expected of a director in that position. This standard may then be subjectively raised if the particular director has any special knowledge, skill and experience.

39
Q

Key case under s 174 for duties of ‘reasonably diligent person’.

A

Re D’Jan of London Ltd [1994]

i) directors have duty to acquire/maintain knowledge
ii) delegation does not absolve duties
iii) no universal application - fact dependant

40
Q

Similarities between s 174 and CDDA?

A

directors have a duty to be proactive in monitoring the actions of delegates and other directors and must keep themselves informed
–> Re Barings plc (No 5) [1999]

41
Q

What do ss 175-177 cover?

A 
Fiduciary duties of LOYALTY. 
- no conflict 
- no misuse/profit of position
key cases:
Aberdeen Rly Co v Blaikie Bros [1854]
Bray v Ford [1896] AC 44
42
Q

What’s s 175, 7 subsections?

A

Duty to avoid conflicts of interest;

(1) A director of a company must avoid a situation in which he has or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property, information or opportunity).
(3) This duty does not apply to a conflict of interests arising in relation to a transaction or arrangement with the company.
(4) This duty is not infringed—
(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interests; or
(b) if the matter has been authorised by the directors.
(5) (a) conflicts may be authorised by independent directors with no interest in the matter unless its constitution otherwise provides.
(b) public company the directors will only be able to authorise such conflicts if its constitution expressly permits.
(6) provides that board authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors
(7) ‘conflict of interests’ includes a conflict of interest and duty and a conflict of duties.

43
Q

Interpretation of s 175?

A

Boardman v Phipps [1966] “whether a reasonable man looking at the relevant facts and circumstances would think that there is a real and sensible possibility of conflict”.

A corporate opportunity is viewed as an asset of the company which may not therefore be misappropriated by the directors. Any such misappropriation will be a breach of duty.

In summary, misappropriation of a corporate opportunity will be a breach of duty by a director because the opportunity is the company’s property. The duty under s 175 is construed strictly.

Director cannot merely resign from a company in order to then exploit a corporate opportunity which would otherwise constitute a breach of section 175.

44
Q

Can a director be a director of more than one company or will this breach s 175?

A

Issue arises where there is a conflict due to the companies competing. General position is that such a conflict will need to be authorised by the company using the process in s 175(5) and 175(6).
note - no breach found in unusual In Plus Ltd v Pyke

45
Q

What’s s 176, 1,2 subsections?

A

Duty not to accept benefits from third parties:

(1) A director must not accept a benefit from a third party conferred by reason of:
(a) his being a director, or
(b) his doing (or not doing) anything as a director).

Should be read in conjunction with the wider no-conflict duty laid down in s.175.

46
Q

What’s s 177, 1 subsection?

A

Duty to declare an interest in a proposed transaction

(1) If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.’

–> example of a situation in which a director is interested in a proposed transaction would be where a director was proposing to sell an asset to the company, or buy an asset from the company.

47
Q

Interpretation of s 177 and s 182?

A

s 177 - duty on directors to disclose an interest in a proposed transaction
s 182 - applies to cases where a director has an interest in a transaction after it has been entered into by the company

one major difference between s 177 and s 182 which concerns the sanctions for breach. Breach of the duty under s 177 leads to civil consequences under s
178, which are the same as for breach of all the other duties (other than s 174), whereas breach of s 182 leads to criminal sanctions under s 183.

48
Q

What are the four types of transaction between company - director where there is risk of conflict between interests of directors and shareholders?

A
  1. Directors’ long-term service contracts (ss 188 – 189)
  2. Substantial property transactions (ss 190 – 196)
  3. Loans, quasi-loans and credit transactions (ss 197 – 214)
  4. Payments for loss of office (ss 215 – 222)
49
Q
  1. Directors’ long-term service contracts (ss 188 – 189) - what’s the conflict?
A

s 188 - service contract provides for director’s employment to have ‘guaranteed term’ - maybe longer than 2 years.

  • -> shareholder approval by ordinary resolution needed.
  • -> if shareholder approval not given, term incorporated into service contract under s 188 is void under s 189(a).
50
Q
  1. Substantial property transactions (s190 – 196) - what’s the conflict?
A

Involve transactions between a company and its directors or connected persons concerning “substantial non-cash assets”. permitted but require shareholder approval.

51
Q

Who’s a connected person under s 190-196 ‘substantial property transactions’? (4) What ss?

A

ss 252 - 254.

  1. director’s family - (close family)
  2. companies in which director hold more than 20% shares
  3. business partner
  4. trustees of trust which director connected with
52
Q

Substantial property transactions can be voidable… unless? What section?

A

s 195 (2)

a) restitution of any money
b) the company has been indemnified in pursuance of this section by any other persons for the loss or damage suffered by it, or
c) rights acquired in good faith

Directors involved liable to account for profits made and to indemnify for any loss incurred.

53
Q
  1. Loans to directors (s 197 – 214) - the conflict?
A

Company loans to directors, although permitted, may also be subject to the requirement of shareholder approval by ordinary resolution.

s 197 - must give info to shareholders re. loan.

Also possible for shareholders to approve the transaction after the event (s 214)

Loan - not defined in CA - but see Champagne Perrier-Jouet SA v HH Finch Ltd [1982]: “a sum of money lent for a period of time, to be returned in money or money’s worth”.

54
Q

Exceptions under loans to directors? ss?

A

ss 204 - 209:

  • s 204: Expenditure on company business (up to a maximum of £50,000)
  • s 205: Loans for defending proceedings brought against a director
  • s 206: Loans for defending regulatory actions or investigations
  • s 207: Minor and business transactions – loans of up to £10,000 do not require shareholder approval
  • s 208: Intra group transactions
  • s 209: Money lending companies (where the loan is made in the ordinary course of the business of the company)
55
Q

Loans to directors can be voidable… unless? What section?

A

s 213:

a) restitution of any money
b) the company has been indemnified in pursuance of this section by any other persons for the loss or damage suffered by it, or
c) rights acquired in good faith

Directors involved (AND THOSE CONNECTED) liable to account for profits made and to indemnify for any loss incurred.

56
Q
  1. Payments for loss of office (s 215 – 222) - the conflict?
A

Under s 217, any payment for loss of office to a director needs to be approved by shareholders by way of an ordinary resolution.

Two exceptions?

s 220 - payment made in good faith
s221 - payment less than £200

57
Q

What s for remedies?

A

THERE ISN’T ONE - Trick QUESTION!

Not codified. s 178 provides:

(1) same as common law duty
(2) duties enforceable in same way as any other fiduciary duty (but not s 174 - breach of common law duty - only damages).

58
Q

What are the remedial options for breach of fiduciary duty? Which s does this exclude?

A
  1. Account for profits – personal / proprietary remedy
  2. Damages
  3. Rescission
  4. Injunction – to prevent the directors from breaching their duties

Does NOT include s 174.

59
Q

Personal/proprietry remedy for account for profits?

A
  1. personal - Murad v Al-Saraj [2005] - only the profits received as a result of the breach are payable.
  2. proprietary - profits are held on constructive trust in all cases where these profits can be identified as an asset capable of being held on constructive trust - FHR European Ventures LLP v Cedar Capital Partners LLC [2014]
60
Q

4 ways in which directors may be relieved of liability for breach of duty under CA 2006?

A
  1. Prior consent, approval or authorisation by the directors where that is permitted (s175, 177);
  2. Prior consent, approval or authorisation by the shareholders (s 180);
  3. Ratification by the shareholders (s 239);
  4. Relief granted by the court (s 1157).
61
Q
  1. Prior approval by the directors – s 175, 177?
A

The effect of this is that no breach of duty will take place

62
Q
  1. Prior approval by the shareholders – s 180?
A

Shareholders can authorise breaches of duty or even negligence but not acts which are unlawful.
Authorisation is only effective provided there has been full disclosure by the directors so that the shareholders are properly informed.

Sharma v Sharma [2013]

63
Q
  1. Ratification – s 239?
A

Shareholders are also able to ratify any conduct by a director amounting to a breach of duty, negligence, default or breach of trust after the breach by ordinary resolution under s 239.
The resolution must be passed disregarding the votes of the director involved, if also a shareholder, or any connected persons (s 239(4)).
Madoff Securities International Ltd v Raven [2011]

64
Q
  1. Relief granted by the court (s 1157)?
A

Section 1157(1) provides as follows:

(1) If in proceedings for negligence, default, breach of duty or breach of trust against—
(a) an officer of a company, or
(b) a person employed by a company as auditor (whether he is or is not an officer of the company)

three part test: the court needs to be satisfied that the director:
• Acted honestly,
• Acted reasonably, and that
• Considering all the circumstances of the case, the director ought fairly to be excused.

65
Q

Although s 232 establishes that a company cannot exempt director from liability in negligence, what 3 specific exceptions?

A
  • Insurance against such liability under s 233;
  • Qualifying third party indemnity provisions under s 234, or
  • Qualifying pension scheme indemnity provisions under s 235.

Company Law (10 decks)

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