W3

Question 1

What are the different types of directors in a company?

Answer 1

There are de jure directors (validly appointed), de facto directors (assume to act as directors but not validly appointed), shadow directors (exert influence over the board without being appointed), executive directors (appointed to executive office and spend most of their time on company business), non-executive directors (provide independent guidance and advice), and alternate directors (take the place of absent directors).

Question 2

What is the relationship between directors and shareholders in a company?

Answer 2

Directors manage the company on a day-to-day basis as agents of the company. Shareholders own the company and have input into certain key decisions through shareholder resolutions. Directors owe duties to the company, while shareholders control key decisions through resolutions.

Question 3

What decisions can directors make without shareholder approval?

Answer 3

Directors can make decisions on behalf of the company without shareholder approval, such as employing individuals, deciding their pay, entering contracts with customers and suppliers, buying and selling company property, raising funds by borrowing, and authorizing the use of company assets as security. They can also delegate decision-making to other directors or committees.

Question 4

Why are directors’ actions and powers restricted and regulated by statute?

Answer 4

Directors’ actions and powers are restricted and regulated by statute to prevent corrupt practices and ensure that companies are run for the benefit of shareholders and the protection of creditors. The Companies Act 2006 includes provisions for directors’ general duties to ensure accountability.

Question 5

What are the duties and liabilities of de facto directors?

Answer 5

De facto directors are individuals who assume to act as directors but have not been validly appointed. They have the same fiduciary duties and liabilities as de jure directors.

Question 6

What is the role of a company secretary?

Answer 6

A company secretary’s main duties include keeping the company books up-to-date, producing minutes of board and general meetings, and ensuring necessary filings are made at Companies House. They do not make decisions on behalf of the company, which is the domain of directors or shareholders.

Question 7

How are directors appointed and removed from office?

Answer 7

The appointment and removal of directors are governed by the provisions of a company’s articles. Generally, the board decides on appointments and terms of service contracts, while shareholder approval may be required for long-term service contracts. Directors can be removed by an ordinary resolution of shareholders or through resignation, disqualification, rotation, or automatic reasons stated in the articles.

Question 8

What information needs to be disclosed regarding directors in a company’s annual accounts?

Answer 8

Certain information relating to financial payments to directors needs to be disclosed in the company’s annual accounts, which must be filed at Companies House. Directors’ personal details must also be provided to Companies House, although their residential addresses may be kept private.

Question 9

What is the difference between executive and non-executive directors?

Answer 9

Executive directors are appointed to executive office and spend most of their time on company business. They are both officers and employees of the company. Non-executive directors are also officers of the company but are not employees. They provide independent guidance and advice to the board.

Question 10

What is the role of alternate directors in a company?

Answer 10

Alternate directors can take the place of absent directors in a company. They are usually either fellow directors or individuals approved by a resolution of the board. Alternate directors have the voting powers of the absent director.

Question 11

What are the main duties of a company secretary?

Answer 11

The main duties of a company secretary include keeping the company books up-to-date, producing minutes of board and general meetings, and ensuring necessary filings are made at Companies House. They do not make decisions on behalf of the company, which is the domain of directors or shareholders.

Question 12

What is the effect of Art 19 MA?

Answer 12

The effect of Art 19 MA is that the terms of an individual director’s service contract, including remuneration, are for the board to determine.

Question 13

When is shareholder approval required for a director’s service agreement?

Answer 13

Shareholder approval is required to enter into long-term service contracts under s 188 CA 2006.

Question 14

What are the separate roles that an individual can have in a company?

Answer 14

An individual can be a director, a shareholder, and an employee of a company. These are three separate roles.

Question 15

What information about directors must be disclosed by a company?

Answer 15

The CA 2006 requires certain details about a company’s directors to be disclosed either publicly or to the members. Every company must maintain a register of its directors and secretary and should keep these registers at its registered office. The information kept at Companies House is available for public inspection.

Question 16

What are the filing requirements when a director leaves office?

Answer 16

When a director leaves office, the company must update the company’s register of directors and give notice to Companies House by filing form TM01 (Termination of appointment of director).

Question 17

What is the purpose of the Company Directors Disqualification Act 1986?

Answer 17

The purpose of the Company Directors Disqualification Act 1986 is to protect the public against the activities of directors who have been disqualified. The Act allows the court to make a disqualification order against a person preventing them from being involved in the promotion, formation, or management of a company.

Question 18

What are the grounds for disqualification under the Company Directors Disqualification Act 1986?

Answer 18

Grounds for disqualification include fraudulent or wrongful trading or persistent breaches of company law. The period of disqualification is for a maximum of 15 years.

Question 19

How can a director be removed from office?

Answer 19

Under s 168(1) CA 2006, a company (i.e., the shareholders) may, by ordinary resolution, remove a director before the expiration of their period of office. Special notice (28 days) is required for a removal resolution. It is not possible for the board to remove a director unless the Articles specifically provide for this. Directors who are also shareholders are allowed to vote in their capacity as a shareholder on the ordinary resolution to remove them.

Question 20

What are the ways in which an individual may cease to be a director?

Answer 20

An individual may cease to be a director through resignation by notice or automatic termination. Resignation by notice involves the director tendering a letter of resignation, and automatic termination occurs when the director becomes disqualified, becomes the subject of an individual voluntary arrangement, becomes bankrupt, or is physically or mentally incapable of acting as a director for more than three months. There are other ways in which an individual may cease to be a director, such as removal by shareholders.

Question 21

What are the duties of directors under CA 2006?

Answer 21

The general duties of directors under CA 2006 are set out in sections 171-177. These duties include acting within the company’s powers, promoting the success of the company, exercising independent judgment, exercising reasonable care, skill and diligence, avoiding conflicts of interest, not accepting benefits from third parties, and declaring any interest in a proposed transaction.

Question 22

What is the central duty of directors under CA 2006?

Answer 22

The central duty of directors under CA 2006 is to promote the success of the company for the benefit of its members as a whole. This duty requires directors to act in a way that they consider, in good faith, would be most likely to promote the success of the company.

Question 23

What matters should directors consider when promoting the success of the company?

Answer 23

Directors should have regard to a range of non-exhaustive matters when promoting the success of the company. These include the likely long-term consequences of any decision, employees’ interests, fostering relationships with suppliers and customers, the impact of the company’s operations on the community and the environment, maintaining a reputation for high standards of business conduct, and acting fairly as between the members of the company.

Question 24

How are directors’ duties related to the company and its stakeholders?

Answer 24

Directors’ duties are owed to the company and not to individual shareholders. The duties shift to the protection of creditors in an insolvency. The statutory duties under CA 2006 apply to all directors and are set out in sections 171-177. The common law and equitable fiduciary duties remain relevant in the interpretation of the statutory duties.

Question 25

What is the duty of directors to act within the company’s powers?

Answer 25

Under section 171 CA 2006, directors have a duty to act within the company’s constitution, which includes everything set out in the company’s articles of association and decisions taken in accordance with the articles. Directors must also exercise their powers for the purposes for which they are conferred and not for improper purposes.

Question 26

What are the duties of directors under sections 175-177 CA 2006?

Answer 26

Sections 175-177 of CA 2006 cover the duties of directors to avoid conflicts of interest, not to accept benefits from third parties, and to declare any interest in a proposed transaction. These duties provide guidelines for directors to act in the best interests of the company and avoid situations that may compromise their objectivity or loyalty.

Question 27

How are companies addressing the duty to promote the success of their company in their board minutes?

Answer 27

Many companies are ensuring that their board minutes clearly note that consideration has been given to the s 172 CA 2006 duty when making board decisions. This is particularly important for significant commercial decisions, where there has been ample research, discussion, and briefing of the board to demonstrate consideration of the matters in s 172(1) CA 2006.

Question 28

What is the requirement for certain companies regarding the s 172 statement in their accounts?

Answer 28

From January 2019, certain companies, including all public listed companies, are required to make a s 172 statement in their accounts. This statement should explain how they have considered and met the duty under s 172 CA 2006 (duty to promote success of their company) over the year.

Question 29

What is the duty codified under s 173 CA 2006?

Answer 29

The duty codified under s 173 CA 2006 is the duty to exercise independent judgment. This duty requires directors to exercise their powers independently and not fetter their discretion, except in accordance with specific provisions that allow for certain restrictions or authorizations.

Question 30

What is the required level of care, skill, and diligence for directors?

Answer 30

The required level of care, skill, and diligence for directors is assessed objectively and subjectively. It is based on the general knowledge, skill, and experience that may reasonably be expected of someone in their role, as well as their own individual knowledge, skill, and experience. The minimum standard expected is the objective standard, but it can be subjectively raised if the director has special knowledge, skill, and experience.

Question 31

What are the consequences of breaching the duties of directors?

Answer 31

The consequences of breaching the duties of directors are the same as for breach of the corresponding common law or equitable principles. The company has a claim against the directors personally in law. Remedies for breach of the duty of care, skill, and diligence (s 174 CA 2006) include damages.

Question 32

What is the duty of directors under s 175 CA 2006?

Answer 32

The duty of directors under s 175 CA 2006 is to avoid conflicts of interest. Directors must avoid situations where they have, or can have, a direct or indirect interest that conflicts or may conflict with the interests of the company. However, this duty does not apply if the conflict arises in relation to a transaction with the company.

Question 33

What is the duty of directors under s 176 CA 2006?

Answer 33

The duty of directors under s 176 CA 2006 is not to accept benefits from third parties that are conferred by reason of them being a director or by reason of them doing (or not doing) anything as a director. However, this duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Question 34

What is the duty of directors under s 177 CA 2006?

Answer 34

The duty of directors under s 177 CA 2006 is to declare any direct or indirect interest in a proposed transaction with the company. This duty also applies to existing transactions or arrangements entered into by the company. The purpose is to ensure transparency and avoid conflicts of interest.

Question 35

What are the procedural matters related to s 177 CA 2006?

Answer 35

Under s 177 CA 2006, directors must declare their interest in a proposed transaction before it is entered into. This declaration can be made at a board meeting or in writing in advance of the meeting. Directors can also give a one-off general notice of their interest. Best practice suggests declaring the interest at the board meeting or through written notice sent to all directors. Indirect interests are also covered by this section.

Question 36

When is a director not required to make a declaration under s 177 CA 2006?

Answer 36

A director is not required to make a declaration under s 177 CA 2006 if they are not aware of the interest or transaction/arrangement, if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the conflict arises from their service contract and has been or will be considered by the board or a committee of directors.

Question 37

What are the consequences for breaching the duty to avoid conflicts of interest?

Answer 37

The consequences for breaching the duty to avoid conflicts of interest are set out under the common law. Shareholders can, in certain circumstances, approve in advance or ratify the conduct of directors. The specific remedies for breach of this duty depend on the circumstances.

Question 38

What are the general duties of directors under sections 171-177 CA 2006?

Answer 38

The general duties of directors under sections 171-177 CA 2006 are as follows: duty to act within powers (s 171 CA 2006), duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006), duty to exercise independent judgment (s 173 CA 2006), duty to exercise reasonable care, skill, and diligence (s 174 CA 2006), duty to avoid conflicts of interest (s 175 CA 2006), duty not to accept benefits from third parties (s 176 CA 2006), and duty to declare any interest in a proposed transaction (s 177 CA 2006).

Question 39

What are the remedies for breaches of general duties other than section 174?

Answer 39

The remedies for breaches of general duties other than section 174 include injunction, setting aside of the transaction, restitution and account of profits, restoration of company property, and damages.

Question 40

Can shareholders approve a director’s proposed action in advance?

Answer 40

Yes, shareholders may support a director’s proposed action and be prepared to approve it in advance, even if it would otherwise represent a breach of the general duties set out in sections 171-177 of the Companies Act 2006. However, shareholders cannot approve unlawful acts in this way.

Question 41

Under what circumstances can directors obtain authority for actions that would otherwise be a breach of duty?

Answer 41

The statutory duties under the Companies Act 2006 have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors that would otherwise be a breach of duty. This represents a continuation of the common law approach. However, authorisation is only effective if there has been full disclosure by the directors so that the shareholders are properly aware of the details of the action and can make an informed decision.

Question 42

How can shareholders ratify the conduct of directors in cases of negligence, default, breach of duty, and breach of trust?

Answer 42

Shareholders can, by ordinary resolution, ratify (approve after the breach) the conduct of directors in cases of negligence, default, breach of duty, and breach of trust. However, if a director holds shares in the company, any votes to ratify their breach that attach to shares held by them or any person connected with them will be disregarded.

Question 43

What types of conduct cannot be ratified by shareholders?

Answer 43

Unlawful acts can never be ratified, and shareholders cannot ratify a director’s breach of fiduciary duty in insolvency situations since directors owe their duties to creditors, not shareholders, once the company is insolvent.

Question 44

What are the requirements for shareholder approval of a director’s long-term service contract?

Answer 44

Shareholder approval by ordinary resolution is required for any director’s service contract that is, or may be, for a guaranteed period in excess of two years. The guaranteed term is the period during which the contract is to continue other than at the instance of the company, where the company either cannot terminate the contract or can only terminate it in specific circumstances. In the absence of approval, the term will be void and the contract deemed to terminate on reasonable notice.

Question 45

Are there any exceptions to the requirement for shareholder approval of a director’s long-term service contract?

Answer 45

Approval is not required by the members of any company that is a wholly-owned subsidiary of another company. However, if the director is also a director of any holding company, the shareholders of the holding company will also need to give approval.

Question 46

What are the consequences of non-compliance with the requirements for a director’s long-term service contract?

Answer 46

If a company agrees to a provision in a service contract that contravenes the requirements, the provision will be void to the extent of the contravention. The contract will be deemed to contain a term entitling the company to terminate it at any time by giving reasonable notice.

Question 47

What is a substantial property transaction and when does it require shareholder approval?

Answer 47

A substantial property transaction is an acquisition or disposal by a director (or connected person) of a substantial non-cash asset to or from the company. Shareholder approval by ordinary resolution is required either before the transaction is entered into or after, provided that the transaction is made conditional on approval being obtained.

Question 48

Are there any exceptions to the requirement for shareholder approval of a substantial property transaction?

Answer 48

Approval is not required by the members of any company that is a wholly-owned subsidiary of another company.

Question 49

What are the consequences of non-compliance with the requirements for a substantial property transaction?

Answer 49

If a company proceeds with a substantial property transaction without obtaining shareholder approval, the directors would be in breach of their general duties under sections 171-177 of the Companies Act 2006, as well as in breach of the specific requirements for substantial property transactions.

Question 50

What is the definition of a substantial non-cash asset?

Answer 50

A substantial non-cash asset is any property other than cash. It is considered substantial if its value is either over £5,000 and equates to more than 10% of the company’s net asset value, or over £100,000.

Question 51

Who are considered connected persons under the Companies Act 2006?

Answer 51

Connected persons include members of the director’s family (spouse or civil partner, parents, children, or step-children), bodies corporate in which the director holds 20% or more of the shares, business partners of the director or those connected with them, and trustees of a trust where the beneficiaries include the director or those connected with them.

Question 52

What are the disclosure and inspection rights related to directors’ service contracts?

Answer 52

A company must keep a copy of all directors’ service contracts (or memoranda of their terms if the contracts are not in writing) at the company’s registered office for a period of at least one year from the date of termination or expiry of the contract. Members have the right to inspect the contracts without charge or request a copy on payment of a fee.

Question 53

Under what circumstances is shareholder approval not required for a company that is a wholly-owned subsidiary of another company?

Answer 53

Approval is not required by the members of any company which is a wholly-owned subsidiary of another company.

Question 54

What are the remedies if a substantial property transaction (SPT) is entered into without shareholder approval?

Answer 54

Under section 195 of the Companies Act 2006, if a SPT is entered into without shareholder approval, the transaction is voidable at the instance of the company. However, restitution may no longer be possible, the company may have been indemnified for the loss or damage suffered, or rights acquired in good faith by a third party would be affected by the avoidance.

Question 55

How can a substantial property transaction (SPT) be affirmed after it has been entered into without shareholder approval?

Answer 55

Section 196 of the Companies Act 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If the transaction is affirmed, it may no longer be avoided under section 195 of the Companies Act 2006.

Question 56

What defenses are available for directors in relation to substantial property transactions (SPTs)?

Answer 56

If the SPT 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 section 190 of the Companies Act 2006, the director will not be liable under section 195(6) of the Companies Act 2006. There is also a defense under section 195(7) of the Companies Act 2006 for any connected person and any director who authorized the transaction, if they can show they had no knowledge of the circumstances constituting the contravention.

Question 57

What are the disclosure requirements for directors in relation to substantial property transactions (SPTs)?

Answer 57

Under section 177 of the Companies Act 2006, a director would need to disclose the nature and extent of their interest to the board if they were interested in any of the transactions caught by sections 197-202 of the Companies Act 2006. It is arguable that an interested director need not formally declare an interest if the other directors are already aware of it, but it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes.

Question 58

What are the restrictions and approval requirements for loans and related transactions with directors?

Answer 58

For private limited companies which are not associated with a public limited company (Plc), the only relevant provision is section 197 of the Companies Act 2006. It provides that an ordinary resolution is required to approve loans to its directors or to directors of its holding company, or give guarantees or enter into security in connection with loans to such directors. Plcs and private limited companies associated with Plcs are subject to further restrictions relating to loans to a person connected to a director of the company/holding company, quasi-loans to, or credit transactions with, their directors/directors of a holding company/connected persons, and guarantees or security in respect of any of these transactions.

Question 59

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

Answer 59

There are a number of exceptions to the requirement for shareholder approval, as set out in sections 204-209 of the Companies Act 2006. These exceptions include expenditure on company business up to a maximum amount, loans for defending proceedings brought against a director, loans for defending regulatory actions or investigations, minor and business transactions, intra-group transactions, and money lending companies where the loan is made in the ordinary course of the business of the company.

Question 60

What are the remedies if shareholder approval is not obtained for loans and related transactions with directors?

Answer 60

If shareholder approval is not obtained and no exceptions apply, the consequences are set out in section 213 of the Companies Act 2006. The arrangement is voidable at the instance of the company unless restitution is no longer possible, the company has been indemnified for the loss or damage suffered, or rights acquired in good faith by a third party would be affected by the avoidance. The directors involved (and those so connected) are liable to account to the company for any profits made and to indemnify the company for any loss incurred. Section 214 of the Companies Act 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period.

Question 61

What defenses are available for directors in relation to loans and related transactions with directors?

Answer 61

If a transaction contravenes sections 200, 201, or 203 of the Companies Act 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 complied with those sections. There is also a defense under section 213(7) of the Companies Act 2006 for any connected person and any director who authorized the transaction, if they can show they had no knowledge of the circumstances constituting the contravention.

Question 62

What are the disclosure requirements for directors in relation to loans and related transactions with directors?

Answer 62

Under section 177 of the Companies Act 2006, a director would need to disclose the nature and extent of their interest to the board if they were interested in any of the transactions caught by sections 197-202 of the Companies Act 2006. It is arguable that an interested director need not formally declare an interest if the other directors are already aware of it, but it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes.

Question 63

What are the restrictions and approval requirements for loans and related transactions with directors in public limited companies (Plcs) and private companies associated with Plcs?

Answer 63

Plcs and private limited companies associated with Plcs are subject to further restrictions relating to loans to a person connected to a director of the company/holding company, quasi-loans to, or credit transactions with, their directors/directors of a holding company/connected persons, and guarantees or security in respect of any of these transactions. Where the transaction is with a director of the holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by ordinary resolution.

Question 64

What are the exceptions to the requirement of shareholder approval for loans and related transactions with directors in public limited companies (Plcs) and private companies associated with Plcs?

Answer 64

There are a number of exceptions to the requirement for shareholder approval, as set out in sections 204-209 of the Companies Act 2006. These exceptions include expenditure on company business up to a maximum amount, loans for defending proceedings brought against a director, loans for defending regulatory actions or investigations, minor and business transactions, intra-group transactions, and money lending companies where the loan is made in the ordinary course of the business of the company.

Question 65

What are the remedies if shareholder approval is not obtained for loans and related transactions with directors in public limited companies (Plcs) and private companies associated with Plcs?

Answer 65

If shareholder approval is not obtained and no exceptions apply, the consequences are set out in section 213 of the Companies Act 2006. The arrangement is voidable at the instance of the company unless restitution is no longer possible, the company has been indemnified for the loss or damage suffered, or rights acquired in good faith by a third party would be affected by the avoidance. The directors involved (and those so connected) are liable to account to the company for any profits made and to indemnify the company for any loss incurred. Section 214 of the Companies Act 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period.

Question 66

What are the procedural requirements for obtaining shareholder approval for transactions between companies and directors?

Answer 66

The procedural requirements for obtaining shareholder approval for transactions between companies and directors include sending or submitting a memorandum setting out the proposed transaction to every eligible member at or before the time the proposed resolution is sent or submitted to the member. The specific rules for these transactions can be found within the relevant statutory authority for each transaction.

Question 67

What types of transactions between companies and directors require shareholder approval?

Answer 67

Various transactions between companies and directors, such as directors’ long-term service contracts, substantial property transactions, and loans, quasi-loans, and credit transactions, require the approval of shareholders by way of ordinary resolution, unless any exceptions apply. Note that wholly-owned subsidiaries are exempt from the requirement to obtain shareholder approval.

Question 68

What is the approach for loans and related transactions to directors?

Answer 68

The approach for loans and related transactions to directors involves several steps: identifying the type of company entering into the transaction (public limited company, private company associated with a plc, or private company not associated with a plc), identifying the type of transaction (loan, quasi loans, credit transactions, security or guarantee for above), determining if shareholder approval is required, and determining which company needs to obtain shareholder approval based on the transaction involved.

Question 69

How are directors appointed and removed in a company?

Answer 69

The appointment and removal of directors in a company are governed by the Articles of Association. Directors may be appointed by an ordinary resolution of the shareholders or by a decision of the directors. Directors may be removed from office in several ways, but the power of directors to remove a director by ordinary resolution is a fundamental protection for shareholders under CA 2006.

Question 70

What are the specific types of transactions between the company and its directors regulated by CA 2006?

Answer 70

CA 2006 regulates three specific types of transactions between the company and its directors (or people connected to them): directors’ long-term service contracts, substantial property transactions, and loans and related transactions. These transactions require the prior approval of shareholders by ordinary resolution, unless any exceptions apply. There are also procedural requirements for these transactions, such as sending a memorandum to shareholders and displaying it at the general meeting.

Question 71

What resolutions are required for a company to implement a loan from the company to one of its directors?

Answer 71

To implement a loan from the company to one of its directors, the company needs to pass an ordinary resolution approved by the shareholders. This resolution requires a memorandum setting out the nature and amount of the loan and the purpose for which it is required to be made available for inspection by the shareholders for at least 15 days ending with the date of the general meeting at which it is voted on and at the general meeting itself. Once the resolution is passed, board resolutions are required to implement the loan, including approving the loan agreement and appointing a director to sign the document on behalf of the company.

Question 72

Shareholder approval by ordinary resolution is required where there is an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.

When should this approval be given?

Answer 72

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 73

What is a substantial non-cash asset?

Answer 73

 An asset worth £5,000 or less is not a substantial asset.
 An asset worth more than £100,000 is a substantial asset.
 An asset worth more than £5,000, but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company’s net asset value. A company’s net asset value is that shown in its most recent statutory accounts.

Question 74

What are the remedies for if there is no shareholder approval for an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company?

Answer 74

o Where a SPT is entered into without shareholder approval, under s 195(2) CA 2006 the transaction is voidable at the instance of the company unless:
 restitution is no longer possible,
 the company has been indemnified for the loss or damage suffered by it, or
 rights acquired in good faith by third party would be affected by the avoidance.
o The directors involved (and those so connected under s 195(4) CA 2006) are liable to account to the company for any profits made and to indemnify the company for any loss incurred s 195(3) CA 2006.
o Section 196 CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If the transaction is affirmed, the arrangement may no longer be avoided under s 195 CA 2006.

Question 75

What are the defences for if there is no shareholder approval for an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company?

Answer 75

o If the SPT 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 s 190 CA 2006, the director will not be liable under s 195(6) CA 2006.
o There is also a defence under s 195(7) CA 2006 for any connected person (if relevant) and any director who authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.

It is important to note:
o Under s 177(1) CA 2006 a director would need to disclose the nature and extent of their interest to the board.
o Under the exception in s177(6)(b) CA 2006, it is arguable that an interested director need not formally to declare an interest if the other directors are already aware of it. However, it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes.
o Under MA 14(1), any interested directors will not be permitted to vote on the board resolutions to approve the contract and authorise a signatory. They cannot count in the quorum for board resolutions regarding the contract either.

Question 76

What is the approach for Approach for loans and related transactions to directors?

Answer 76

Step 1: Identify the type of company entering into the transaction
* Public limited company
* Private company associated with a plc
* Private company not associated with a plc
Step 2: Identify the type of transaction
* Loan
* Quasi loans
* Credit transactions
* Security or guarantee for above
* TO
* Director of company
* Director of holdco
* Person connected to director of company
* Person connected to director of holdco
Step 3: Is shareholder approval required? – situations where share holder approval would be required
* Private co not associated + Loans or Security/Guarantee for loan + Director of company or Director of holdco
* Plc or Private co associated with plc + Loans or Quasi loans or Credit transactions or Security/Guarantee for above + Director of company or person connected or Director of holdco or person connected
Step 4: Which company needs to obtain shareholder approval?
* The company if the transaction is between the company and one of its directors or person connected to one of its directors.
* The company and the holdco if the transaction is between the company and a director of its holdco or person connected to a director of its holdco.
Step 5: Are there any available exceptions?
* Wholly-owned subsidiary
* Holding Company
* Minor and business transactions
* Loans and quasi loans up to £10,000
* Credit transactions up to £15,000

Question 77

What are the transactions shareholder approval may be needed for?

Answer 77

 Loans – where the company lends money to a director (197 CA 2006);
 Quasi-loans – as defined in s 199 CA 2006. An example of a quasi-loan would be where a company agreed to pay off an outstanding account owed by a director to a third party on the understanding that the director would later reimburse the company;
* Where it is not exactly a loan but has the same effect of a loan
o Paying off a third party
 Credit Transactions – as defined in s 202 CA 2006. A credit transaction includes any transaction entered into between the company and the director where the company provides goods or services on a credit basis which will be paid for at a later date. Only the company and the director will be parties to this arrangement; and
* Something the company buys in its normal course of business and it is paid back over time
 Guarantees or the provision of security for any of the above – eg where a director obtains a loan from a bank and their company stands as guarantor for the repayment of the loan or the company provides the bank with security over its assets.

Question 78

How can a company exceute a deed?

Answer 78

Under s 44 CA 2006, a company can execute a deed by:
*
affixing its seal; or
*
by the signatures of:

∘
two authorised signatories (a director or company secretary); or
∘
a director of the company in the presence of a witness who attests the signature.