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Business Law and Practice > U3 + U4 Directors > Flashcards

U3 + U4 Directors Flashcards

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1
Q

What is the definition of a director?

A

Directors are any person occupying the position of directors, by whatever name they are called.

Thus, the definition is very wide and also includes:

-Shadow Directors (Influencing directors)

  • De Facto Directors (Acting as director)
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2
Q

What is a shadow director?

A

A person who is not directly appointed as a director, yet exercises a major influence on the directors and the directors are accustomed to act in accordance with their instructions

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3
Q

What is a De Facto Director?

A

A person who has not been properly appointed as a director, yet performs the role or a director

Or a person who continues to act as a director even after their term of office has expired

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4
Q

What is the minimum amount of directors for a Private Limited Comapany (LTD)?

What is the minimum amount of directors for a public limited company (PLC)

A
  1. 1 for LTD
  2. 2 for PLC
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5
Q

Can a company be a director?

A

Yes, but there must always be atleast one natural person director

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6
Q

What are the 4 personal requirements of a director?

A

Directors must be:

  1. Atleast 16 years old
  2. Not be disqualified
  3. Not be Bankrupt
  4. Must be Physically and mentally capable
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7
Q

What is the difference between first directors and subsequent directors?

A

First directors are those named in Part 2 of the INO1 Form when incorporating the company, and are automatically appointed on incorporation.

Subsequent directors are those that are not first directors

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8
Q

Where does the procedure for appointing subsequent directors come from?

A

The companies articles

(Model articles if not amended)

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9
Q

What are the 2 types of directors?

What is the difference?

A
  1. Non Executive Directors
  2. Executive Directors

Non-exeutive directors only act as a director, are not employed by the company, and thus do not have an employment contract. They only receive fees for their director duties.

Executive directors hold the office of director, but are also an employee of the company, earning a salary with an employment contract. Such as a finance director, managing director, sales director.

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10
Q

What are the 2 ways a Non Executive Director can be appointed following the Model Articles?

A

Can be appointed by:

  1. Directors with a board resolution (QUICKEST)
  2. Shareholders by Ordinary resolution
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11
Q

How are Executive Directors appointed?

A

Only by directors board resolution

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12
Q

What is the difference in how non-executive and executive directors can be appointed?

A

Exeutive Directors can only be appointed by the directors board resolution

Non Exeutive Directors can be appointed by a board resolution by directors, or an ordinary resolution by the shareholders after a general meeting

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13
Q

What 2 things must a company do after appointing a subsequent director?

A
  1. Update the register of directors and the register of directors residential addresses (internal records)
  2. File form AP01 (for individual directors) or AP02 (for coporate body directors) with companies house within 14 days.
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14
Q

What are the 7 statutory directors’ duties?

A
  1. To act within the company’s constitution and to exercise powers for the proper purposes (companies best interest)
  2. To Promote the Success of the Company (Subjective, hard to breach)
  3. To exercise independent Judgement
  4. To Exercise reasonable care, skill, and diligence (Objective)
  5. To avoid conflicts of interest
  6. Not to accept benefits from third parties
  7. To declare interest in a proposed transaction with the company
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15
Q

What is the difference between directors and share holders as compared to shareholders?

A

Directors owe fiduciary duties to their company. In comparison, shareholders may act in their own interests.

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16
Q

What is the duty to act within the companies constitution and exercise powers for the proper purpose?

Given an example

A
  1. To act within the companies constitution
    If the companies articles provides shareholders approval must be sought for a certain decision, failure would be a breach.
  2. To exercise powers for the proper purpose
    This must be exercises in the best interests of the company, and personal issues should not sway

For example, Directors owe fiduciary duties to their company. In comparison, shareholders may act in their own interests.

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17
Q

What is the duty to promote the success of the company?

A

Directors must act in a way 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.

The test is subjective, and directors must have regard to 6 factors:

  1. Long term consequences
  2. Employees interests
  3. The need to foster good business relationships
  4. Impact on community and the environment
  5. The desirability of maintaining a reputation for high standards of business conduct
  6. The need to act fairly between members

As this test is subjective, and directors only need to HAVE REGARD, it can be very hard to breach

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18
Q

When can directors agree to vote in a certain way without fettering their right to exercise independent judgement?

A

If done in good faith and in the best interests of the company

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19
Q

If a director seeks legal or financial advice, will this feter their duty to exercise independent judgement?

A

No

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20
Q

What is the test used to establish If a director has exercised reasonable care, skill and diligence?

Give an example

A

The standard of care is that of a reasonably diligent person (objective)

There is a minimum objective standard which may be raised based on the actual knowledge, skill and experience that director has (subjective)

For example:

A Director, who is also an experienced commercial solicitor authorises the company to enter into a contract without reading the terms. The terms are unerous. Is she in breach of her duty?

Yes, a director would usually be expected to consider commercial terms, and as a solicitor, she is expected to be even more careful.

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21
Q

What type of company can get authorization to act where the director has a conflict of interest?

A

Only in private companies can a director seek authorisation via a board resolution to continue to act where their is a conflict of interest.

They will not be able to vote on this

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22
Q

When can directors accept benefits from a third party?

A

The standard of care is that of a reasonably diligent person (objective)

There is a minimum objective standard which may be raised based on the actual knowledge, skill and experience that director has (subjective)

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23
Q

What are the 4 circumstances a director may be personally liable to a third party ?

A
  1. Personal Guarantee (Loans)

or

  1. Wrongful Trading (Insolvent Comapny)
  2. Fraudulent Trading (Isolvent Company)
  3. Misfesances (Winding Up)
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24
Q

Who can take action against a director for a breach of duty?

A

Only the company, as the duties are owed to the company.

However, shareholders may also take DERIVATIVE ACTION if the directors fail to act

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25
Q

What 3 remedies can be sought if a director breaches one of his duties?

A
  1. An account of profits (lost) paid to the company
  2. Injunction
  3. Damages
26
Q

What is ratification?

How is it passed?

A

The Shareholders may ratify (authorise) a breach of duty

Via an Ordinary Resolution (More than 50%)

(If the director is also a shareholder, of course his vote wont count)

27
Q

What is wrongful trading?

What is the effect of it?

What is the test?

What is the only defence?

A
  1. WRONGFUL TRADING
    Wrongful trading is where a director of a insolvent company entered into trades before insolvency, when they knew or ought to have known there was no reasonable prospect of the company avoiding insolvency proceedings
  2. EFFECT
    If committed, the director can be personally liable to third parties. The director may be liable to contribute to the assets of the company.
  3. TEST
    An objective and subjective test. Of a reasonable person, and a person with the directors knowledge and experience

4.DEFENCE

The director took every step to minimise potential loss to creditors as ought to have been taken

28
Q

What is fraudlent trading and what is the effect?

A

If a director carried on business with the intent to defraud creditors or for fraudulent purposes, they may be liable to contribute to the assets of a company.

It is harder to prove than wrongful trading, as an INTENT to defraud must be shown

Criminal Offence

29
Q

What is a misfesasance and what is its effect?

A

Where a previous breach of a director is discovered on winding up of the company, personal liability may be imposed.

30
Q

Where are directors derived from and what are they subject to?

A

The directors powers are derived from the companies articles

The directors wide power of management is subject to any instruction given to the board by special resolution of the members / shareholders.

31
Q

How do directors exersie their powers?

A

Either:

  1. At a board meeting via a board resolution
  2. Via a unanimous agreement
32
Q

What is deadlock?

A

Deadlock is where there is an equal amount of people voting for different options, and so a decision cannot be made.

the chairman will have the final vote.

33
Q

Can directors delegate their powers?

A

Yes

34
Q

What are the 3 catogories of rules that apply to directors and disclosure of information?

A
  1. Statutory register (internal) requirements
  2. Name display requirements
  3. Service Contract Requirments
35
Q

What 2 rules relates to directors and discolsure with regards the statutory register?

A
  1. The company must maintain a register of directors, and a register of the directors residential address unless an exemption has been applied for.
  2. If these details change from what is registered with companies house, they must be reported to companies house using form CH01 for individual directors, or CH02 for corporate body directors
36
Q

What 3 Rules relate to the displaying of the companies name?

A
  1. The company’s name must be displayed at its registered office
  2. The company’s name, registered number, and registered office address must be displayed in business letters.
  3. Directors need not be named, but if 1 is, they all must be.
37
Q

What 3 things must be registered on companies’ business letters?

A
  1. Company Name
  2. Registered company number
  3. Registered address
38
Q

What are the 2 rules of disclosure in relation to directors’ service contracts?

A
  1. Directors service contracts or memorandum of terms must be kept for up to 1 year after expiry
  2. Members (shareholders) have the right to inspect directors service contracts
39
Q

Where do restrictions on directors come from?

What do the restrictions require?

A

Restrictions on directors come from the companies act

THE RESTRICTIONS REQUIRE SHAREHOLDER APPROVAL BY ORDINARY RESOLTION

40
Q

What do the 4 restrictions on directors relate to?

What is required?

A
  1. Directors Service Contracts
  2. SUBSTANTIAL PROPERTY TRANSACTIONS
  3. Loans to Directors
  4. Payment for loss of office

THE RESTRICTIONS REQUIRE SHAREHOLDER APPROVAL BY ORDINARY RESOLUTION

41
Q

How are directors service contracts granted?

A

They are granted by a board resolution of the directors under their general management powers

However, if the contract gives a guaranteed employment term of MORE THAN 2 years, share holder approval via ordinary resolution (MORE THAN 50%) is required. (This is because if wrongfully terminated, company liable for full remaining term)

If an ordinary resolution should have been passed and wasn’t, the contract can be terminated on reasonable notice.

42
Q

A director will have a conflict of interest with regards to their own service contracts.

What is the effect of this?

A
  1. They will not be able to vote on the matter or count towards the quorum
  2. They do not need to disclose this conflict of interest
43
Q

What is the effect of a substantial property transaction?

What is a substantial property transaction? 2 parts

A

A substantial property transaction also requires the approval of the shareholders via an ordinary resolution (more than 50%)

A substantial property transaction is the ACQUISITION OR DISPOSAL of a noncash asset that meets 2 criteria:

  1. The Parties are - The company and a director, OR, a person connected to a director
  2. The Value Criteria of substantial property is met.

The property must be worth more than £5k

and It must either be:

over £100k

or

Over 10% of the companies NET ASSET VALUE

44
Q

What is the value for a transaction to be a substantial property transaction?

A
  1. It must be over £5k
  2. And either be:
         a- More than 100k

      b - More than 10% of the companies NET ASSET VALUE
45
Q

What are the 2 catogories of people connected to a director for the purposes of a substantial property transaction?

A
  1. Family
  2. Body Coporate
46
Q

Who is ‘Family’ For the purposes of a person connected to a director for SPT?

A
  1. Spouces, Civil Partners, Romantic Partners
  2. Children, Step Children, Children of Romantic Partners
  3. Parents

(THUS NOT SIBLINGS, GRANDPARENTS, GRANDCHILDREN, UNCLES, AUNTS, NIECE, NEPHEW)

47
Q

What is a body coporate person connected to a director for the purposes of a SPT ?

A

The company has a director in common, or person connected to a director in common, who owns 20% or more voting shares

48
Q

What happens if directors makes a substantial property transaction at board meeting without the shareholder approval via ordinary resolution?

A

The transaction is VOID

49
Q

When must a loan to a director have approval via ordinary resolution?

When must the memorandum be available?

What is the effect if there is no OR?

A
  1. Loans over 10k
  2. A memorandum of the propsed terms must be available 15 days prior to the meeting and at the meeting itself.
  3. Other wise the transaction will be voidable, unless ratified by OR within 15 days
50
Q

What payment amount paid to directors for their termination (loss of office) has to be approved by share holders ordinary resolution?

A

If a director is paid more than £200 on the termination of their office (role), it requires shareholder approval via ordinary resolution

This does not relate to obligations in relation to an existing contract or legal obligation.

51
Q

Once appointed, how long will a director hold office for?

What are the 4 ways a director can be removed?

A

Once appointed, a director holds office for life unless removed in one of the 4 ways:

  1. Voluntarly Resignation
  2. Removal: Bankruptcy, composition with creditors, incapacity
  3. Removal: Under companies act (SHARE HOLDER REMOVAL VIA OR)
  4. Disqualification by Court (Company Directors Disqualification Act)
52
Q

How can a director voluntarly resign?

What is the affect of the an executive directors service contract?

A

A director can resign by serving notice on the company

Executive directors have to adhere to the terms of their service contract / general employment law (ie when there term is for)

53
Q

How can a director be removed?

A
  1. Removal by a shareholder orindary resolution derived from statute
  2. Removal by falling into a category of:

Bankrupt
Entering into a composition with creditors
Physical or mental capacity

54
Q

Can shareholders remove directors?

A

Yes, via an ordinary resolution but they must follow the 3 steps:

  1. First inform the director, and the company serve notice of the general meeting
  2. The director has the right to make representations before and at the time of the general meeting (and so written resolution cannot work here (where there no gm ) )
  3. Once the ordinary resolution has passed, they give special notice of 28 days to the company, or it will be ineffective
55
Q

What are the 2 rule considerations when shareholders are removing a director via special resolution?

A
  1. Bushel v Faith Clause (Alternate voting values in companies articles)

A clause giving shareholding directors an alternative voting value, such as 2 votes for every 1 they usually have.

  1. Shareholder agreements

May provide agreement as to how to exercise voting powers in such circustances

56
Q

Can directors who are also shareholders vote in the decision of their removal?

A

Yes, and if the articles are ammended, there may be a Bushel v Faith clause given them higher voting weight

For example, 2 votes for everyone they normally get

57
Q

What 2 things must companies do after the voluntary resignation or removal of a director?

A
  1. Stautory books - if they are not excluded and keep internal records, they must update the register of directors and the register of directors residential addresses
  2. File a TM01 form for individual directors or TM02 form for corporate body directors with company house
58
Q

How long can the court disqualify a director for?

A

Between 2 - 15 years

59
Q

What are the 6 main grounds that a court can disqualify a director for?

A

The court can disqualify a director for 2-15 years for:

  1. Conviction of an indictable offense
  2. Persistent breaches of company legislation
  3. Fraud in winding up
  4. Summary Conviction for failure to comply with company legislation
  5. Wrongful or Fraudulent Trading
  6. Being an unfit director of an insolvent company
60
Q

What is the affect of breaching a disqualification of acting as a director?

A

Breaching a disqualification is a criminal offence and the director will be personally liable

61
Q

What are the 2 considerations when disqualifying a director for ‘ Being an Unfit director of an insolvent company?

A
  1. Criminal Offence
  2. Director personally liable

Business Law and Practice (5 decks)

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