WS3 - Directors

Question 1

Role of directors - a) Introduction: What is important to remember?

Answer 1

Companies are inanimate and therfore it is the directors who on a day to day are responsible to manage it through the agency relationship.

Question 2

Role of directors - a) Introduction: Who are directors accountable to?

Answer 2

The company rather than the shareholders directly.

Question 3

Role of directors - a) Introduction: What are key charactertics of directors?

Answer 3

• Manage company on day to day on agency basis
• Certain actions can only be taken by them if shareholders give authority
• Owe duties to the company

Question 4

Role of directors - a) Introduction: What are the key characteritics of shareholders?

Answer 4

Own the company
Are able to control key decisions throguh shareholder resolutions

Question 5

Role of directors - a) Introduction: What is it common for in small and family companies?

Answer 5

Shareholders/directors to be the same person.

Question 6

Role of directors - b) Directors authority to manage the company: Is there any limit to the directors authority?

Answer 6

CA 2006 reserves certain important decisions for shareholder approval such as changing company’s name, amending articles and removing direcotrs.

Question 7

Role of directors - b) Directors authority to manage the company: Beyond this limit, how can directors act?

Answer 7

Company with MA< directors usually free to make decisions on all other matters.

Question 8

Role of directors - b) Directors authority to manage the company: What are some actions direcotrs can take?

Answer 8

Can act on behalf of company to:
* Employ individiauls (Other than directors with long term service contracts) - Potential key question
* Decide pay
* Enter contracts withc ustomers and suppliers
* Buy/Sell company property
* Raise funds by borrwing using company assets as security
* Manage company accounts

Question 9

Role of directors - b) Directors authority to manage the company: Can actions be delegated?

Answer 9

MA5 allows board to delegate particular decisions and responsbilities for day to day running to one of directors or comittees suc as HR director delegated decision making for HR matters.

Question 10

Role of directors - c) Directors Accountability: How is Direcotrs power checked?

Answer 10

Directors powers are wide and to prevent corrupt individuals and the protect shareholders, creditors of the company, etc the directors actions and powers are restricted and regulated by statute. (Key provisions are in part 10 CA which we wil look at.

Question 11

Role of directors - c) Directors Accountability: Who can directors be made to account to?

Answer 11

• They can be made to account for any wrongs through civil and criminal actions for breach of the companies act.
• Can also be foudn guility of other acts such as Fraud Act, Theft Act, Money Laundering under proceeds of crime act, etc.

Question 12

Role of directors - d) What is a director: How is Director defined?

Answer 12

• Not defined in CA 2006
• Instead, CA 2006 states director includes any person occupying position of director by whatever named called.

Question 13

Role of directors - d) What is a director: What are the different catergories of director we consider at law?

Answer 13

• De Jure
• De Facto
• Shadow Directors

Question 14

Role of directors - d) What is a director: What ate the types of categories in practice?

Answer 14

• Executive
• Non-Executive

Question 15

Role of directors - d) What is a director - (i) De Jure Directors: What is a De Jure Director?

Answer 15

Director who has been validly appointed at law.

Question 16

Role of directors - d) What is a director - (i) De Jure Directors What are the requirements at law?

Answer 16

CA 2006:
* Private limited company must have at least one director and
* Public limited must have at least two
* While companies can be director, every company must have at least one who is a natural person to aid accountability.
* No maximum number in CA or MA, but Articles can put a maximum number.
* Must be over 16 years old to be.

Question 17

Role of directors - d) What is a director - (ii) De facto Directors: What is a De Facto Director?

Answer 17

Someone who assumes to act as a director but has not bee valdily appointed as such.

Question 18

Role of directors - d) What is a director - (ii) De facto Directors: How do fiduciary duties and liabilities apply to de facto and de jure?

Answer 18

Applies to both.

Question 19

Role of directors - d) What is a director - (iii) Shadow Directors: What is a shadow director and when may one arise?

Answer 19

• Defined as a person in accordance whose directions the directors are assustomed to act.

Question 20

Role of directors - d) What is a director - (iii) Shadow Directors: What is the purpose of shadow directors?

Answer 20

Legislation designed to ensure anyone who acts as a director, even if not appointed one, will be subject to duties and restrictions which apply to all, so a friend of direcgtor giving advice from “behind scenes” which directors follow, would be a shadow director.

Question 21

Role of directors - d) What is a director - (iii) Shadow Directors: Who will not be a shadow director?

Answer 21

CA makes clear professional advisers are not to be regarded such as accountant providing advice, even if the directors follow the advice.

Question 22

Role of directors - d) What is a director - (iii) Shadow Directors: How do CA and Insolvency act apply to Shadow directors?

Answer 22

Most of provisions of those acts imposing duties, obligations and restriction apply equally.

Question 23

Role of directors - d) What is a director - (iv) Executive and non-executive directors: How does this distinction arise?

Answer 23

• CA 2006 does not diffeentiate between the two.
• In practice, the distinction arises, but note, all duties, obligations and restrictions apply to directors where executive or non-exec.

Question 24

Role of directors - d) What is a director - (iv) Executive and non-executive directors: What is an executive director?

Answer 24

One who has been appointed to executive office and such will generally spend most of their time working on the business of the company and will be both office and employee such as finance director, managing director or marketing.

Question 25

Role of directors - d) What is a director - (iv) Executive and non-executive directors: What is non-executive?

Answer 25

They are also an office of the company but not an employee of the company so will not take part in day to day running, their role is usually to provide indepdent guidance to board and protect interest of SH’s.

Question 26

Role of directors - d) What is a director - (v) Alternate Directors: What is an Alternate director?

Answer 26

Some companies in their articles provide for alternate directors to take place of director where one more more directors absent.

Question 27

Role of directors - d) What is a director - (v) Alternate Directors: Who will they usually be and what powers?

Answer 27

Fellow director of company or someone approved by resolution of board, and hold voting powers of absent director.

Question 28

Role of directors - d) What is a director - (v) Alternate Directors: What is the position under MA?

Answer 28

They do not provide for appointment of alternative directors.

Question 29

Role of directors - d) What is a director - (v) Alternate Directors: How do provisions of CA apply to alternate?

Answer 29

Matter of construction but thrugh that duties of directors will apply equally to alternate.

Question 30

Role of directors - d) What is a director - (vi) Company Secretary: What is a company sec?

Answer 30

Officer of the company who deals with company’s legal administrative requirements such as:

• Keeping comapny internal books up to date
• Produce minutes of board and GM’s
• Make sure necessary filings made a companies house

Question 31

Role of directors - d) What is a director - (vi) Company Secretary: Are companies required to have company sec under CA?

Answer 31

• Private company is not required to have company secretary unless articles require it to have one and if they do not, directors (or anyone they authorise) may do anything sec required or authorised to do.
• Public Comapny must have a company sec and under Ca they must have requisite knowledge and experince and one of qualification set out in s273 such as they may be solicitor or chartered accountant. - Directors must appoint under resolution and check they meet requirements.

Question 32

Appointmenet of directors and relevant matters - a) Appointment: Where is the procedure for appointment found?

Answer 32

CA do not provide, so this is something deal with by the companies articles.

If MA, then see below, but therefore is always important to check the articles in case fo customised articles before advising on appointment.

Question 33

Appointmenet of directors and relevant matters - a) Appointment: How does MA deal with appointment?

Answer 33

• By ordinary resolution of shareholders - MA17(1)(a)
• By decision of the directors - MA17(1)(b) (This is usually used as easier to put into effect, unless particular reason to use ordinary resolution

Question 34

Appointmenet of directors and relevant matters - b) Service Contracts: What will exectuive director be and what should they be given?

Answer 34

• An employee of the company as well as an officer.
• As employee, they should be given written contract of empoyment (service contract)
• Useful as no automatic entitlement for directors to be paid for services, this is something board can determine, subject to articles

Question 35

Appointmenet of directors and relevant matters - b) Service Contracts: Where must service contracts be kept?

Answer 35

At their registered office for inspection by its members.

Question 36

Appointmenet of directors and relevant matters - b) Service Contracts: What approval do service contracts require?

Answer 36

• General rule is it will only require approval of directors through board resolution.
• However, it is is a long term service contract, then shareholder approval is requrired.

Question 37

Appointmenet of directors and relevant matters - c) Disclosure of identity of directors and company sec: What does CA require to be disclosed publicaly or to members?

Answer 37

• Every company must maintain register of directors and sec’s and this should be kept at registered office.
• Each company must also notify registrar of companies of changes to its directors or company secretary. (Form AP01 for Directgor and AP03 for Secretary)

Question 38

Appointmenet of directors and relevant matters - c) Disclosure of identity of directors and company sec: How must information ad CH and registered office be available?

Answer 38

• Information at CH is available for inspection by the public.
• Register at registered office musty be open for inspection by any member of company without charge and by any other persn on paymeny of a fee

Question 39

Appointmenet of directors and relevant matters - d) Privacy for Officers of Company: How does CA 2006 allow for more confidentiality?

Answer 39

• CA s163 specifies only a service address for director needs to be included and S277 for Company secs and this address can be residential address or could be company registered office if they concerned with privacy.
• Note- Any residential addresses already on public register will not be removed automatically.
• Individual directors (but not secreaties) will still have to provide their residential address but this info is kept on seperate secure register not open to public.

Question 40

Appointmenet of directors and relevant matters - e) Disclosure required in annual accounts: What does CA set out for directors (and past) remuneration for inclusion in annual accounts?

Answer 40

Two statutory instruments set out what must be included:
* Directors Salaries, bonus payments and pension enetitlements and
* Compensation paid to directors and past directors for loss of office.

Question 41

Appointmenet of directors and relevant matters - e) Disclosure required in annual accounts: What else must be disclosed relating to directors?

Answer 41

• Any payments made to or received by person connected to such a director or a body corporate controlled by a director.
• Information of advances and credits given by company to directors and guarantees entered into company on behalf of its directors.

Question 42

Removal of Directors and relevant matters - a) Removal by shareholders: How may shareholders remove?

Answer 42

• S168 CA - SH’s can by ordinary resolution remove a director before expiration of their period of office.

Question 43

Removal of Directors and relevant matters - a) Removal by shareholders: What notice is required?

Answer 43

Special note (28 clear days) is required of such a removal resolution.

Question 44

Removal of Directors and relevant matters - a) Removal by shareholders: Who cannot remove a director and what if director also shareholder?

Answer 44

• Board cannot remove unless articles specifically provide for it.
• Those also shareholders are allowed to vote in capacity as sharegolder to remove them and may have additional voting rights if articles amended or sharegolders agreement.

Question 45

Removal of Directors and relevant matters - b) Vacation from Office: What are th way individual may cease to be director?

Answer 45

• Resignation by notice
• Automatic termiantion
• Disqualification - Company Directors Disqualification Act
• Retireent by rotation

Question 47

Removal of Directors and relevant matters - b) Vacation from Office - (i) Resignation by notice: What is the procedure?

Answer 47

• Director can simply resign from board through letter of resignation.
• Provided for in MA 18 and it is usual but not required for board to pass resolution accepting letter of resignation. - Potential key quesition

Question 48

Removal of Directors and relevant matters - b) Vacation from Office - (ii) Automatic Termiantion: When will person cease to be director automatically?

Answer 48

Under MA 18:
* Becomes disqualifed from being a director
* Subject of an individual voluntary arrangement
* Becomes bankrupt
* A registered medical practitioner treating writes to company that they are physically or mentally incapable as acting and will remain so for more than 3 months.

Question 49

Removal of Directors and relevant matters - b) Vacation from Office - (iii) Disqualification: When will this arise?

Answer 49

Under Company Directors Disqualification Act:
* Court may make disqualification order against person preveting them without leave of court to be director, liquidator or any way involved indirectly in promortion or management of a company.
* Grounds for this order include fradulent or wrongful trading or persistent breach of company law.
* Period for disqualification is for maximum of 15 years and if disqualified its criminal offence to do any of above without leave of court.

Question 50

Removal of Directors and relevant matters - b) Vacation from Office - (iv) Retirement by rotation: What does MA require for public companies?

Answer 50

MA requires retirement and reappointment of directs by the members ever three years and in addition all directors of listed companies subject to annual reelection.

Question 51

Removal of Directors and relevant matters - b) Vacation from Office: What is required when a director does leave office?

Answer 51

• Company must update both company register of directors internally and also give notes to CH by filing form TM01 (Termination of appointment of director.

Question 52

Duties and responsibilities of directors - a) Introduction: Where are these duties now found?

Answer 52

Duties were developed by common law and equity but codified in CA 2006 - s171 to s177 and they should be interpreted and applied in same way as common law and equitable principles.

Question 53

Duties and responsibilities of directors - a) Introduction: What is the general rule for who these duties are owed? (Potential key question)

Answer 53

• Owed by director o the company and not shareholders directly.
• Any breach is therfore wrong to the company and would be company who would be the claimant in any proceedings

Question 54

Duties and responsibilities of directors - a) Introduction: What is the exception to general rule above?

Answer 54

If company is in financial difficulty, then position changes and directors duties shift to protection of creditors.

Question 55

Duties and responsibilities of directors - b) General duties of directors (s170-177): What are the general duties?

Answer 55

• Duty to act within powers
• Duty to promote the success of the company for benefit of members as whole
• Duty to exercise indepedent judgement
• Duty to exercise reasonable care, skill and dilligence
• Duty to avoid conflcits of interest
• Duty not to accept benefits from TP’s
• Duty to declare any interest in a proposed transaction

Question 56

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (1) Duty to Act within Powers: What are the two seperate duties conferred by this section of this act?

Answer 56

• Duty to Act within the companys constitution: Constituion is defined to include everthing set out in the articles and decisions taken in accordance with them (SH resolutions) and director will breach this if they act without authority.
• Duty to exercise powers for purposes which they are conferred: Must not use thier powers for improper purpose such as personal gain.

Question 57

Duties and responsibilities of directors - b) General duties of directors (s170-177) -(2) Duty to promote success of company for benefit of members as whole: What is this provision said t codify from common law?

Answer 57

Duty to act honestly and in good faith in best inerests of the company.

Question 58

Duties and responsibilities of directors - b) General duties of directors (s170-177) -(2) Duty to promote success of company for benefit of members as whole: What does this require of directors?

Answer 58

• Director must act in a way which is considered in good faith which would be most likely propmting success of company for benefit of members as whole.
• Government stated success should normally mean for commercial companies a long term increase in value.

Question 59

Duties and responsibilities of directors - b) General duties of directors (s170-177) -(2) Duty to promote success of company for benefit of members as whole: What stakeholder interests do directors need to be mindeful of when making decisions?

Answer 59

In exercising this duty, directors mus have regard to the following non-exuastive matters:
* Likely consequence of any decision in long term
* Interests of company employees
* Need to foster the company’s business relationship with suppliers, customers and others
* Impact of company’s operations on community and environment
* Desirability of company maintain a reputation for high standards of business conduct
* Need to act fairly as between members of company

See page 72 for example of directors weighing up the factors above.

Question 60

Duties and responsibilities of directors - b) General duties of directors (s170-177) -(2) Duty to promote success of company for benefit of members as whole: What is the list above secondary to?

Answer 60

The duty to shareholders under this duty to sharegolders as a whole, and that the duty is owed to company and nto any TP.

Question 61

Duties and responsibilities of directors - b) General duties of directors (s170-177) -(2) Duty to promote success of company for benefit of members as whole: What uncertainty did the CA create in balancing the list above?

Answer 61

• Uncertain as to how to balance the various matters in the lsit which will inevitably conflict from time to time.
• Many Companies are aking common sense approach of ensuring board minutes clearly note that consideration has been given to the S172 duty when taking board decisions.

Question 62

Duties and responsibilities of directors - b) General duties of directors (s170-177) -(2) Duty to promote success of company for benefit of members as whole: What must certain companies do since Jan 2019?

Answer 62

Certain companies including all public listed must make S172 statement in accounts about how thye considered and met this duty over the year.

Question 63

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (3) Duty to exercise indepedent judgement: What does this duty codify?

Answer 63

Principle of law that directors must exercise powers indepedently and not fetter future exercise of discretion othe than in accordance with the act.

Question 64

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (3) Duty to exercise indepedent judgement: What does this provision set out this duty will not be infrindged by?

Answer 64

Will not be infrindged by director in his acting:
* (A) In accordance with agreement entered into company that resricts future exercise of discretion by directors or
* (B) In a way authorised by company’s constituion

Question 65

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (3) Duty to exercise indepedent judgement: How must directors therfore make their decisions?

Answer 65

• They can rely on advice from others but must make their own judgements and be midneufl of the inidivudal nature of this duty when acting.
• They cannot blidnly follow others without cosnidering interests of company.

Question 66

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (4) Duty to exercise reasonable care, skill and dilligence: What is the level which must be exercised?

Answer 66

Level of care, skill and diligence is assesed objectively and subjectively

Question 67

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (4) Duty to exercise reasonable care, skill and dilligence: What is the test?

Answer 67

The required level is that which would be xercised by a reaosnably diligent person with:
* The general knowldge, skill and experince that may be reasonably expected of someone in their role; and
* The general knowledge, skill and experince of that director

Question 68

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (4) Duty to exercise reasonable care, skill and dilligence: What is the minimum standard expected?

Answer 68

That objectively expected of director in that position and this standard may then be subjectively raised to higher level if particular director has any special knowldge, skill and experince.

Question 69

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (5) Duty to avoid conflicts of interest: What does this duty require?

Answer 69

First of the duties aimed at conflict and this is to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict with interests of the company.

An example would be X is director of company A and approached b to become director of Company B (A’s biggest competitor) then S175 would apply as there is obvious potential conflict and board approval should be sought by X from both boards at time Company B directorship entered or X should refuse.

Question 70

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (5) Duty to avoid conflicts of interest: How is this duty drafted?

Answer 70

Widely and is said to apply in particular to the exploitaiton of any property, information or opporunity and it is no excuse for director to say that the opporunity is not one compny would have exploited itself.

Question 71

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (5) Duty to avoid conflicts of interest: When will this duty not be infringed? -Potential key question

Answer 71

If the situation cannot reasonably be regarded as likely to give rise to cofnlict or it one arises:
* In relation to a transaction with company (e.g between director and company)
* In relation to matter which has been authorised by directors

Question 72

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (5) Duty to avoid conflicts of interest: What conflict are expressly excluded under the proivison? - Potential Key question

Answer 72

Those in relation to transactions or arrangements with the company as these are subject to disclosure in s177 for transparaency but are not prohibted.

An example would be: X is director of company A and directtor of Company B (after approval by board of A) If company B wish to sell asset to company A, this would fall under S175(3) exception.

Look at examples for this.

Question 73

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (6) Duty not to accept benefits from TP’s: What must a director not do?

Answer 73

Second of the three duties aimed for conflict and director must not accept benefit from TP which is conferred by reason of them being a director or by reason of them doing or not doing anything as director.

E.G: Director accepting bribe or making profit at company expense by virtue of their position as director.

Question 74

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (6) Duty not to accept benefits from TP’s: When will this not be breached?

Answer 74

If acceptance of benefit cannot reasonably be regarded as likely to give rise to conflict of interest.

Question 75

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (6) Duty not to accept benefits from TP’s: What can the other directors not do unlike S175 above but who can?

Answer 75

They cannot authorised an arrangement under this section, however, shareholders can approve proposed action in advance or for ratification under s239.

Question 76

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (7) Duty to declare an interest in proposed transaction What must directors do for proposed transaction with company?

Answer 76

Third of three duties aimed at conflcit and any director interest in proposed transaction with cmpany must declare the nature and extent of their interest to other directors and this covers both direct and indirect.

E.G: Company A is about to sign contract with Company B and director of A happens to be sharegolder of B, therefore will have indirect interest in transaction. The S175(3) exception would apply to prevent breach of S175 but director stands to gain from personal sharegolding in B if company A signs and must therfore tell directors of A about sharegolder before signature of the contract.

Question 77

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (7) Duty to declare an interest in proposed transaction What else are directors required to disclose?

Answer 77

In addition to proposed transactions, directors must also disclose interests in existing transactions or arrangeemnts.

Question 78

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (7) Duty to declare an interest in proposed transaction What are the procedural matters relating to this duty?

Answer 78

• It applies equally to indirect interests and these not always easy to identify but if throug a spouse or other relative or through a company which they are a member, then liekly to have indirect. Note: They do not have to be party to transaction for it to apply.
• Director must declare interest in proposed transaction before it is entered, subject to anything in articles.
• Declaration can be at a BM or in writing in advance of a BM but also possible for directors to give one off general notice of their interest but best practice is at BM.
• If director disclosed to other directors by written notice not meeting, then it must be sent to all either directors.
• Under s185, director can give general notice to effect they are always to be considered interest in any transaction/arrangement with specified party such as in a specific firm or company.

Question 79

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (7) Duty to declare an interest in proposed transaction When does a director not need to make a declaration under this duty?

Answer 79

• Director is not aware of the interst or transaction in question (but they will be reated as aware if it is amtter they ought reasonable to have been aware)
• Interest cannot reasonbly be regarded as likely to give rise to conflict or other director know or ought to have known about the conflict or
• If the conflict arises because it concerns their service contract and their service contract or wil be considered by board or comittee of the board

Question 80

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (7) Duty to declare an interest in proposed transaction: How does this provision interact with MA? - Key question

Answer 80

MA 14 states director who is interested in transaction or arrangeemnt with company cannot vote or count in the quorum for board resolution in respect of it.

Question 81

Duties and responsibilities of directors - b) General duties of directors (s170-177) - (7) Duty to declare an interest in proposed transaction: When could MA 14 cause issue and when can conflicted director count and vote?

Answer 81

• If the company disapplies MA 14 by ordinary resolution
• If directors interest cannot reasonably be regarded as likely to give rise to conflict
• Directors conflict arises from permitted cause defined in Ma 14

An alternative or more permeant mesaure would be to remove MA 14 under s21 CA and replace it with article expressly permitting director interest with company to vote and count to appove the transaction.

Question 82

Remedies for breach of directors duties: Who can claim against directors for breach?

Answer 82

As noted, directors owe duties to the company rather than individual sharegolders, so if they breach, company has claim against them personally in law.

Question 83

Remedies for breach of directors duties: What are the consequences for directors?

Answer 83

The same as brwach of corresponding common law or equitable principles with the exception of the duty to exercise reasonable skill, care and diligence.

Question 84

Remedies for breach of directors duties: What is the remedy for breach fo reasonable care, skill and dilligence?

Answer 84

The remedy for this breach is damages.

Question 85

Remedies for breach of directors duties: What is the remedy for breaches of the other general duties?

Answer 85

• Injuncton
• Setting aside the transaction
• Resitution and account of profits
• Restoration of company property
• Damages

Question 86

Shareholder Approval in advance of breach: What can shareholders support?

Answer 86

Shareohlders may support proposed action and prepared to approve in advance even if otherwise would represent a breach of the general duties, but this will not include any unlawful acts!

Question 87

Shareholder Approval in advance of breach: When is authorisation only effective?

Answer 87

Authorisation is only effective provided there is full disclosure by directors so shareholders are fully aware of details and can make informed decision.

Question 88

Ratification for Breach of Duty: What can shareholders do after a breach?

Answer 88

They can by ordianry resolution subject to anything in articles requiring higher majority or unamnity, ratify (approve) breach relating to the following conduct:
* Negligence
* Default
* Breach of duty
* Breach of trust

Question 89

Ratification for Breach of Duty: What if the director in breach holds shares? - Key question

Answer 89

Any votes to ratify their breach which attach to shares held by them or any person connected with them (spouse, children, etc) will be disregarded.

Question 90

Ratification for Breach of Duty: What is the position for unlawful acts?

Answer 90

They can never be ratified and sharegolders cannot ratify directors breach of fiduciary duty in insolvency situations since directors owe duties to creditors not shareholders once company is insolvent. - Key question.

Question 91

Transactions with Directors - a) Introduction: What are the three transactions between company and directors regulated by the CA and what does this require?

Answer 91

In order for the following transactions to be valid, they require the approval of company shareoholders:
* Directors long term service contracts
* Substantial property transactions
* Loans, quasi loans and credit transactions

Question 92

Transactions with Directors - b) Long term service contracts: What is required for grant or long term service contracts and what is one?

Answer 92

Under s188, sareholder approval by ordinary resolution is required for any directors service contract which is, or may be for a guaranteed period in excess of two years known as the “guaranteed term”

Note - If director also director of any holding company, shareholder of holding company will also need to give approval.

Question 93

Transactions with Directors - b) Long term service contracts: What does guaranteed term apply to??

Answer 93

This applies to either:
* A period which contract is to continue other than at the instance of the company (i.e contractual term of more than two years or where director in control or how long it continues) and during this time, the company either cannot terminate or can only terminate in specific circumstances.
* Period of notice to be given by the company.

E.G: If company unable to terminate service contract for firs 18 months fo term and then after must give minimum of 9 months notice, then this will fall within a guaranteed term as the aggregate period is in excess of two years.

Question 94

Transactions with Directors - b) Long term service contracts: What is the exception for this approval?

Answer 94

Not required by members of any company which is wholly owned subsidiary of another company.

**However, note just because shareholders do not need to, the board will still need to deal with service contract. **

See example on P78

Question 95

Transactions with Directors - b) Long term service contracts: What are the consequences of not complying with this approval?

Answer 95

• The provision will be void to the extent of the contravention of s188 under s189 (Note, just this provision is void regarding the guaranteed period, not the contract
• The contract will be deemed to containa term entitling the company to terminate at any time by giving reasonable notice.

Question 96

Transactions with Directors - b) Long term service contracts: How does S188 (approval requirement) interact with MA and disclosure requirements?

Answer 96

• Directors are not required under s177 to disclose their interest in service contract, however, likely to remain the practice they will make the declaration so it is documented in minutes.
• Also, the director will not be permitted to vote or count in the quorum on any board resolution relating to the contract (MA14) - So, if director is already on the board when their service contract dealt with, then they will not count within the vote or quorum. (So, key question could be recognising they wouldn’t count in the quorum etc.)

Question 97

Transactions with Directors - b) Long term service contracts: What rights do members have for inspection of service contracts?

Answer 97

• S228 CA: Company must keep copy of all directors service contract (if not in writing, then a memorandum of terms) including any varations to them at company’s registered office or place specified under CA for at least one year during and from the date of termination or expiry for memebrs to inspect.
• This obligation applies regardless of the length of the service contract and there is no charge for inspection and can have a copy on payment of fee.

Question 98

Transactions with Directors - b) Long term service contracts: What are the procedural rules relating to long term service contracts?

Answer 98

If Ordinary resolution to be passed, s188s ets out a memorandum setting out proposed terms must be made available for inspection by members both:
* At the registered office for not less than 15 days ending with date of meeting
* At the meeting itself

A minimum of 15 days notice of GM held to approve contract will therfore have to be given to sharegolders, even if short notice procedure followed unless written resoluion procedure used.

No 15 day requirement for written resolution and if written followed for passing ordinary resolution, memorandum setting out proposed contract must be sent to every eligble member at or before time which proposed resolution is sent or submit to memeber.

Question 99

Transactions with Directors - b) Long term service contracts: What is the position if director already appointed to board when board dealing with the service contract?

Question 100

Transactions with Directors - c) Substantial Property Transactions: What will this consider?

Answer 100

Substantial property transactons between companies and their directors.

Question 101

Transactions with Directors - c) Substantial Property Transactions: What will substantial property transactions involved?

Answer 101

Acquisition or disposal by a director of a company or a director of the company’s holding company (or a person connected to such directors) of a substantial non-cash assets from or to the company.

Question 102

Transactions with Directors - c) Substantial Property Transactions: Are such transactions permitted?

Answer 102

They are but require sharegolder approval by way of an ordinary resolution and this msut be given either before transaction entered, or after provided that it is made conditional on approval being obtained.

Question 103

Transactions with Directors - c) Substantial Property Transactions: What type of asset must it be to be caught under S190?

Answer 103

It must be a substantial non-cash assets which means any property other than cash.

Substantial is also defined as:

• An asset worth £5,000 or less is not 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 it is worth more than 10% of the company’s net asset volume (Potential question)

If company new and no accounts, net asset value taken to be amount of company’s up share capital.

If yes, then consider who is involved in the transaction, either director or person connected with such (see below)

Question 104

Transactions with Directors - c) Substantial Property Transactions: Who is a connected person?

Answer 104

The definition of person connected is complex and these are defined in the act as:
* Members of directors family: Spouse, CP, Parwents, children, step children (however, brothers, sisters, grandparents, grandchidlren, uncles and aunts are not connected person!
* Bodies corporate (companies in which director and other persons connected with them and hold at least 20% of the shares)
* A business partner of the director or those persons connected wit them.
* Trustees of a trust the beneficiaries of which include the director or those persons connected with them.

See example on P81

Question 105

Transactions with Directors - c) Substantial Property Transactions: What is the position for holding companies?

Answer 105

If transaction between company and director of company’s holdign company or person connected to director of holding company, holding company will also need to approve transactionby ordinary resolution of shareholders.

Question 106

Transactions with Directors - c) Substantial Property Transactions - (a) Exceptions What are the exceptions related to substantial property transactions?

Answer 106

Approval is not required by members of any company which is a wholly owned subsidiary of another company as per long service contracts.

Also list of exceptions in s192 - Do we need??

Question 107

Transactions with Directors - c) Substantial Property Transactions - b) Remedies: What happens if substantial property transaction entered without approval?

Answer 107

The transaction is voidable at the instance of the company unless:
* Restituion is no longer possible
* The company has been indemnifed for the loss or damage suffered by it or
* Rights aquired in good faith by TP would be affected by the avoidance

Question 108

Transactions with Directors - c) Substantial Property Transactions - b) Remedies: How are the directors involved liable?

Answer 108

Directors including those that authorised and those so conneced are liable to account to company for any profits made and to indemnify company for any loss.

Question 109

Transactions with Directors - c) Substantial Property Transactions - b) Remedies: Can the sharegolders affirm the arrangement?

Answer 109

Under S196 they can affirm by ordinary resolution within a reasonable period, if so, then it may no longer be avoided as per above.

Question 110

Transactions with Directors - c) Substantial Property Transactions - 3) Defences: What if it can be shown reasonable steps taken to ensure company compliance with s190?

Answer 110

If sbstantial proeprty tansaction between company and a personc onnected with director and director can show they took all reasonable steps to ensure company compliance with s190 then they will not be liable.

Question 111

Transactions with Directors - c) Substantial Property Transactions - 3) Defences: What if they had no knowledge?

Answer 111

If director or any connected person can show they had no knowledge constiting the contravention then there will be defence.

Question 112

Transactions with Directors - d) Loans and related transactions with directors - (i) Introduction: Are loans permitted and what may be required?

Answer 112

Company loans to directors, holding company directors and connected persons are permitted but may also be subject to the requirement of sharegolder approval by ordinary resolution.

Question 113

Transactions with Directors - d) Loans and related transactions with directors - (i) Introduction: What are the different transactions which the restrictions apply to?

Answer 113

• Loans - where company lends money to director - s197
• Qusai Loans - this would be where a company agreed to pay off an outstanding account owed by director to TP on understanding director would later reimbutse the company.
• Credit transactions - A credit transactions include any transactions entered into between company and director where company provides goods/service on credit basis to be paid at later date.
• Guarantees or provision of security for anythng above - For example where director obtains loan from bank and their company stands as guarantor for repayment of loan or company provides bank secuirty over assets.

Question 114

Transactions with Directors - d) Loans and related transactions with directors - (i) Introduction: What is it important to distingiush?

Answer 114

For these restrictions, must distingiush between private companes on one hand and public companies and private companies associated with public on the other.

Under s256, they will be associated if one is a subsidiary or the other or both subsidiares of the same body corporate.

Question 115

Transactions with Directors - d) Loans and related transactions with directors - (i) Introduction: What is position for private companies not associated with plc?

Answer 115

They are subject to much less regulation than plcs or those associated with them.

Question 116

Transactions with Directors - d) Loans and related transactions with directors - (ii) All comapnies: What is the position for all companies and loans, guarantees or security?

Answer 116

No company may make loans to directors or directors of its holding company or give guaranteers or enter into security in connection with loans without transaction being approved by shareoholders by ordinary resolution.

This is the case even if private without any association to public company but these are the only transactions where shareholder will be required for private companies, the other transactions above will not need.

Example: Loan is straight forward lending of money such as if company wishes to lend a director £50k to assist with cost of training.

Question 117

Transactions with Directors - d) Loans and related transactions with directors - (iii) Public companies and private companies associated with them:: When will shareholder holder approval also be required for these companies?

Answer 117

• Loans to a person connected to a director of the company or director of holding company
• Qusi loans to or credit transactions with directors and directors of a holding company or persons connected with such
• Guarantees or security in respect of any such loans, quasi loans, credit transactions with directors, directors of holding company or persons connected.

See P84 for examples of these loans.

Question 118

Transactions with Directors - d) Loans and related transactions with directors - (iv) Exceptions: What are the exceptiosn to the requirement of shareholder approval?

Answer 118

• Expenditure on company business up to max of £50k
• Loans for defneding proceeds broguth against director
• Loans for defneding regulatory actions or investigations
• Minor and business transactions - loans or qusai loans up to £10,000 and credit transactions up to £15,000 (potential queston)
• Intra group transactions and
• Money lending companies where loan made in ordinary course of business of company

Question 119

Transactions with Directors - d) Loans and related transactions with directors - (iv) Exceptions: What if it is a wholly owned subsidiary of another company for these types of transactions?

Answer 119

Apporoval as with the previous two matters is not required of any company which is wholly owned subsidiary of another company.

Question 120

Transactions with Directors - d) Loans and related transactions with directors - (iv) Exceptions: What if it is a holding company?

Answer 120

If transaction between a company and a direcotr of the company’s holding company or person conencted tod irector of holding company, then the holding company will also need to approve transactionby ordinary resolution.

Question 121

Transactions with Directors - d) Loans and related transactions with directors - (v)Defences: Is there a defence for reasonable steps?

Answer 121

If transaction contravenes above and is entered into with person connected with director, that director will not be liable if taken all reasonable steps to ensure company complied with those sections.

Question 122

Transactions with Directors - d) Loans and related transactions with directors - (v)Defences: Is there a defence for no knowledge?

Answer 122

There is defence for any connected person and any director that authorised transaction who can show they had no knowledge of circumstances leading to contravention

Question 123

Transactions with Directors - d) Loans and related transactions with directors - () Remedies: What are remedies if approval not obtained and no exceptions apply?

Answer 123

The arrangement is voidable at isntance of the company unless:
* restitution no longer possible
* Comapyn idnemnfied for loss or damage suffered
* Rights aquired in good faith by a TP would be affected by the avoidance.

Question 124

Transactions with Directors - d) Loans and related transactions with directors - () Remedies: What are the consequences for directors and those connected?

Answer 124

Liable to account to company for any profits and indemnitfy the company for any loss incurred.

Question 125

Transactions with Directors - d) Loans and related transactions with directors - () What are the procedural issues: