Workshop 3: Directors' Duties and Responsibilities Flashcards
**Topic: Directors' Duties and Responsibilities** - The role of directors - Appointment and removal of directors - Duties and responsibilities of directors pt.1 - Duties and responsibilities of directors pt.2 - Directors’ long term service contracts - Substantial property transactions - Loans and related transactions with directors
What’s the relationship between directors and the company?
- Manage the company on a day to day basis (agency relationship)
- Can only take certain decisions per shareholders authority
- Owes duties to the company
What’s the relationship between shareholders and the company?
- Own the company
- Control key decisions through shareholder resolutions
What are some types of decisions reserved for shareholders and their approval only, unless the MA provide otherwise?
- Amend articles
- Remove directors
- Changing the company’s name
What kind of things can directors do on behalf of the company without shareholder approval?
- Employ individuals
- Decided employees wages
- Enter into contracts with customers and suppliers
- Buy and sell company property
- Raise funds by borrowing from banks
- Authorise company’s assets to be used as security
- Putting together company accounts
- Supply information to auditors
What are the names of the three types of directors at law?
- De jure
- De factor
- Shadow directors
What are the names of the two types of directors in practice?
- Executive
- Non-executive
What is a ‘de jure’ director?
A director who has been validly appointed at law
How many directors does s.154 CA 2006 oblige private limited companies to have?
At least one natural director
How many directors does s.154 CA 2006 oblige public limited companies to have?
At least two directors, with at least one being a natural director
Do the MA or CA2006 prescribe each company to have a maximum number of directors?
No - but this can be incorporated into a company’s MA
What is a ‘de facto’ director?
Someone who assumes ole of a director but has not been validly appointed
Do fiduciary duties and liabilities apply to de facto directors as they do to de jure directors?
Yes
What does s.251(1) CA 2006 define a ‘shadow director’ as?
A person in accordance with whose directions or instructions the directors of the company are accustomed to act
Essentially someone (usually a shareholder) trying to exert influence over the board of directors/gives instructions ‘behind the scenes’ which directors follow
Are professional advisers, like accountants and lawyers, shadow directors?
No
Do provisions in the CA 2006 and Insolvency Act 1986 apple to shadow directors, despite the nature of their role?
Yes
Do the provisions under CA 2006 apply to both executive and non-executive directors in practice?
Yes
What are the main differences between an executive vs. non-executive director?
Executive - spend majority of time working on business; usually an officer and employee of company
executive - not an employee; do not take part in day to day running of business; provide independent guidance and advice to board; protect shareholders’ interests
What is an alternate director?
A director that takes place of a director where one or more directors are absent
What type of person is usually an alternate director?
Fellow director of company or someone approved by resolution of the board
TRUE OR FALSE
The alternate director does not have the voting powers of the absent director
False
They do
Is it thought that duties of directors extent to alternate directors?
Yes
What are a company secretary’s duties?
- Keep company books up to date
- Produce minutes of board and general meetings
- Ensure filings are made at CH
What does the CA 2006 oblige private and public companies to have regarding a company secretary?
Private company - not required
Public company - required
What are the two main ways in a standard MA that companies may appoint a director?
- By an ordinary shareholders’ resolution
- By a decision of directors
What approval is required for a company to enter into a long-term service contract with a director according to s.1888 CA 2006?
Shareholder approval
What is generally required for a director’s service agreement to go forward?
Approval of a resolution of the board of directors
Who must be notified of changes relating to a company’s directors and/or secretary?
Registrar of Companies
What is the name of the form required to be filled out following changes of appointment of director?
AP01
What is the name of the form required to be filled out following changes of appointment of secretary?
AP03
Where does CA 2006 oblige certain details about a company’s directors to be disclosed?
Publicly or to the members [shareholders]
Where must every company maintain their register of directors and secretary?
At their registered office
What information relating to directors is to be included in a company’s annual acccounts?
- Directors’ salaries, bonus payments and pension entitlements
- Compensation paid to directors and past directors for loss of office
- Advances and credits given to directors by a company
- Guarantees entered into by a company on behalf of its directors
TRUE OR FALSE
Section 412 CA 2006 requires the details of payments made to, or receivable by, a person connected to directors or corporate body controlled by a director
True
Who is allowed to remove directors, unless MA state otherwise?
Shareholders only
What notice and resolution is required for a shareholder to remove a director?
Special notice and a removal resolution
How long is a ‘special notice’?
28 days
Can a shareholder who is also a director vote in their capacity as a shareholder to remove them on an ordinary resolution?
Yes
How can a director cease from acting in their role under ‘resignation by notice’?
Tendering a letter of resignation
How do directors accept a director’s choice to resign by notice?
Pass a board resolution
What are the four circumstances within ‘automatic termination’ whereby a director ceases from operating in his role?
- Director becomes disqualified from being a director
- Director becomes subject of individual voluntary arrangement
- Director becomes bankrupt
- Registered medical practitioner treating doctor writes to the company director has become physically or mentally incapable of acting as a director and will remain so for more than three months
What are some of the grounds for disqualification of a director under Company Directors Disqualification Act 1986?
- Fraudulent trading
- Wrongful trading
- Persistent breaches of company law
How long is the period of disqualification under Company Directors Disqualification Act 1986?
Max of 15 years
What is retirement by rotation for public companies?
Where MA require the retirement and reappointment of directors by members every three years
What is retirement by rotation for public listed companies?
All directors are subject to annual re-election
What are some examples of executive directors?
- Finance director
- Managing director
- HR director
What must a company do following the leave of a director?
The company must update the company’s register of directors and give notice to CH by filing form TM01
What resolution is required for a new director to be appointed by the board of directors?
By a board resolution
Who are a director’s duties owed to?
The company and not to the shareholders director
Who would be the claimant in proceedings when a breach of a director’s duty has ocurred?
Company
What statutory duties are under s171-177 CA 2006?
- 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).
How is s.171 split into two further duties?
a) duty to act within company’s constitution
b) duty to exercise powers for purpose for which they were conferred
When is a director in breach of their duty to act within a company’s constitution?
If they act without authority
Like committing the company to borrow more than the articles allow without prior shareholder approval
What is a main purpose for which director’s power have not been conferred under s.171?
Personal gain - this would be a breach of statutory duty
What must a director have regard to when exercising their s.172 duty to promote the success of the company?
- The likely long-term consequences of any decision
- Employees interets
- Need to foster relationships with supplies, customers and others
- Need to act fairly as between members of company
What does the Government meant by ‘success’ in s.172 CA 2006 for commercial companies?
‘Long-term increase in value’
What are the two ways the level of care, skill and diligence of a director under s.174 is assessed?
- Objectively (general knowledge, skill and experience reasonably expected of someone in their role) and
- Subjectively (general knowledge, skill and experience of that director)
What kind of approval and by what resolution is needed for the permission of acquisition or disposal of a ‘substantial non-cash asset’ to or from the company under s.190 CA 2006?
Shareholder approval by ordinary resolution
When must shareholder approval be given in a substantial non-cash asset transaction?
Before or after, as long as the transaction is made conditional on approval being obtained
What three ways does s.191 CA 2006 define ‘substantial’ when speaking about non-cash assets?
Asset worth
- More than £100k
- More than £5k - £100k, only if it’s worth than more of 10% of company’s net asset value
What is a company’s net asset value if the company has only been recently incorporated with now accounts?
Net asset value to be the amount of company’s called up share capital
Is a non-cash asset worth £5k or less a substantial asset?
No
What categories of people are ‘persons connected with a director’ set out in ss.252-254 CA 2006 that are important for gauging whether a substantial property transaction has taken place?
- Spouse/civil partner
- Parents
- Children
- Step children
- Business partner of director or those connected with them
- Trustees of a trust the beneficiaries which include director or those connected with them
- Companies which the director and others connected with them hold 20% or more of the shares
Who needs to be the acquisition or disposal of a ‘substantial property transaction’ need to be made between under s.190 CA 2006?
- A director
- holding company director
- connected persons to either TO OR FROM
- Company
What is the subject matter of a substantial property transaction under 2190 CA 2006?
[Substantial] non-cash asset
What is the exception to the shareholder approval by ordinary resolution being required for a substantial property transaction between company and director of company’s holding company or persons connected to such director under s.190 CA 2006?
Shareholder approval not required if any company is a wholly-owned subsidiary of another company
What happens if a substantial property transaction is entered into without shareholder approval under s.195(2) CA 2006?
It is voidable at the instance of the company
What are the exceptions of a substantial property transaction being entered into being voidable under under s.195(2) CA 2006?
a) restitution is no longer possible
b) the company has been indemnified for the loss or damage suffered by it
c) rights acquired in good faith would be affected by the avoidance
What are the available defences for not being found liable for an unlawful entering into of a substantial property transaction?
- s.195(6) CA 2006 if directors concerned can show they took all reasonable steps to ensure company’s compliance with s.190
- s.195(7) CA 2006 if directors authorised transaction can show they had no knowledge of circumstances constituting the breach
What are the rules for a director interested in a substantial property transaction when voting on board resolution to approve contract and authorise signatory?
They are not permitted on the board resolution to do so
They cannot count in the quorum for board resolutions regarding the contract either
What must a director do, and as is good practice, under s.177 CA 2006 if they have an interest in the substantial property?
They would need to disclose their nature and extent of their interest to the board
Who will shareholder approval be required from in a scenario that there is a substantial property transaction between a company and [the shareholders of] another company who is wholly-owned by another company?
The holding company, as you don’t need approval from the wholly-owned subsidiary shareholders
How are company loans approved when they are made to:
- Directors
- Holding company directors
- Connected persons to either ^
Shareholder approval by ordinary resolution
What are four types of transactions loans to director that shareholder approval is required under s.197 - 214 CA 2006?
- Loans
- Quasi-loans
- Credit transactions
- Guarantees or the provision of security for any of the above
What two categories of companies are restricted by the loans to directors provisions under s.197 - 214 CA 2006?
- Private companies that aren’t associated with a PLC
- PLCs or private companies associated with PLC
Which of the two categories of companies restricted by the the loans to directors provisions under s.197 - 214 CA 2006 have less restrictions?
Private companies that aren’t associated with a PLC
Which of the two categories of companies restricted by the the loans to directors provisions under s.197 - 214 CA 2006 have more restrictions?
PLCs or private companies associated with PLC
How does s.256 CA 2006 define a company to be ‘associated’ for the provisions of loans to directors?
- If one company is a subsidiary of the other
- If both companies are subsidiaries of the same body corporate
What approval and resolutions are required for the approval of any company making loans or giving guarantees or security for directors?
Shareholder approval
Ordinary resolution
What transactions do public and private companies associated with public companies require shareholder approval?
For whom?
For a person connected to director of company or a director of its holding company
- Loans
- Quasi-loans
- Credit transactions
- Guarantees
- Securities
When may an exception to the requirement for shareholder approval apply in loans and related transactions according to s.204 - 209?
- Expenditure on company business
- Loans for defending regulatory actions/investigations
- Minor business transactions (loans max of £10k, credit transactions max £15k)
- Intra group transactions
- Where loan is made in ordinary course of company’s business
What are directors involved in voidable transactions liable to do?
- Account to company for any profits made
- Indemnify company for incurred losses
What is the effect of a transaction where shareholder approval is not obtained and exceptions apply?
Arrangement is voidable
When may a loan or related transaction with directors not be voidable when shareholder approval is not obtained and no exceptions apply?
- Restitution is no longer possible
- Company has been indemnified for loss/damage suffered by transaction
- Rights acquired in good faith by third party would be avoided by making the transaction voidable
What defences are available in the event of breach of conditions required for valid transaction arrangement?
- If transaction is entered into with connected person to director where director took all reasonable steps to ensure company complied with those sections
- If director or connected persons can show they had no knowledge of circumstances constituting contravention
Is approval required by shareholder if the member of any company is a wholly-owned subsidiary of another company?
No
Will the holding company also need to approve a transaction between a company and director of the company’s holding company or person connected to director of holding company by shareholder approval and ordinary resolution?
Yes
Does a director need to disclose the nature and extent of their interest if they were interested in any of the transactions if the directors are already aware?
No - but it is good practice
What can a director interested in a transaction not be involved in?
- Quorum for board resolutions regarding the contract governing the transaction
- Approve the transaction
- Authorise a signatory
When and where must a memorandum setting our the proposed transaction be made available for inspection by members when ordinary resolution is being passed at a GM?
Applicable for transactions and long term service contracts
At company registered office for not less than 15 days ending with the date of the meeting and
at the meeting itself
What does the memorandum needing to be made available not less than 15 days ending with the date of the meeting mean for the notice required to be given for the GM?
Applicable for transactions and long term service contracts
Minimum if 15 days notice will need to be given to shareholders, unless written resolution procedure is used
When and where must a memorandum setting our the proposed transaction be made available for inspection by members when ordinary resolution is being passed via written resolution?
Applicable for transactions and long term service contracts
Before or at the time at which the proposed resolution is sent or submitted to the member
What does s.175 duty of avoiding conflicts of interest apply to?
Exploitation of property information or opportunity
Is a director’s duty infringed where the conflict arises in relation to a transaction with the company?
No
Is a director’s duty infringed where the conflict arises in relation to a matter which has been authorised by the directors?
No
How can a breach of s.176 director’s duty to not accept benefits from third parties be circumvented?
By a shareholder’s approval in advance or for ratification
What kinds of interests are directors required to disclose their interests in actions of?
Both direct and indirect
When must and where can a director’s declaration of interest be made regarding a proposed transaction?
Before the transaction
In/at:
- Board meeting
- In writing in advance of the BM
- One-off general notice
How must a director give their declaration of interest in a proposed transaction if done so by way of writing?
Sent to directors electronically, if agreed upon, or
In paper form
How exactly does a director give a one-off notice interest in a propose transaction?
They can state how they will always be considered interested in transactions with
- Specified parties
- Specified body corporate or firm
- Specified person
When is a director not required to make a declaration of interest in a transaction?
- Director is unaware of interest
- Interest cannot be reasonably regarded as giving a rise to conflict of interest or other directors know or out to know about the conflict of interest
- If conflict arises because it concerns their service contract and it will be considered by the board
When may the general rule ruling a director to not count in the quorum and vote, particularly in small companies?
- If company disapplies MA 14(1) each time conflict rises by ordinary resolution
- If director’s interest cannot reasonably be regarded to give rise to conflict of interest
- Conflict of interest arises from permitted cause
What is the remedy for breach of director common law duty of care, skill and diligence (s.174)?
Damages
What are the remedies for breach of all directors duties minus s.174?
- Injunction
- Setting aside of the transaction
- Restitution and account of profits
- Restoration of company property
- Damages
What kinds of conducts can shareholders approve of subject to MA?
- Negligence
- Default
- Breach of duty
- Breach of trust
What approval and resolution is required for the ratification of a director’s duty?
Shareholder approval
Ordinary resolution
TRUE OR FALSE
If a director is also a shareholder, their vote to ratify their breach will not be disregarded
False - it will be disregarded
Which acts/which circumstances can never be ratified?
- Anything unlawful
- Director’s breach of fiduciary duty in insolvency situations
Who do directors owe duties to in the situation their company is insolvent?
Creditors
What approval and by what resolution is a service contract of a guaranteed period in excess of two years is required?
Shareholders approval by ordinary resolution
What are the two potential instances the ‘guaranteed term’ applies to?
- Contractual term of more than two years or where the direct is in control of how long the contract continues) and the company cannot terminate the contract/can terminate in specific circumstances within this period or
- Period of notice to be given by company
Will shareholders of the holding company need to give approval for long-term service contract if the director is also a director of any other holding company?
Yes
What are the consequences of non-compliance regarding the approval of long-term service contracts?
- Provision will be void to extent of breach
- Contract will be deemed to contain a term entitling the company to terminate it any any time by giving of reasonable notice
Is the following service contract a long-term service contract that requires shareholders approval by ordinary resolution?:
Company unable to terminate director’s service contract for first 18 months of term
Thereafter needs to give min. 9 months notice to terminate
Yes
What exception may be applicable to shareholder approval by ordinary resolution not being needed?
Where subsidiary is a wholly owned subsidiary
Does the service contract require shareholders approval if the director has the option to right to renew and extend contract with notice period exceeding 2 years and the company doesn’t?
Yes
