BLP: Directors

Question 1

What is the role of directors in a company?

Answer 1

Directors manage the company on a day-to-day basis as agents of the company, making decisions on employment, contracts, borrowing, asset use, and preparing accounts, subject to shareholder authority for reserved matters.

Question 2

Under the CA 2006, who do directors owe their duties to?

Answer 2

Directors owe their duties to the company itself (not directly to shareholders), and when the company is in financial distress, their duties shift towards protecting creditors.

Question 3

Name three categories of director recognized under CA 2006.

Answer 3

De jure directors (validly appointed), de facto directors (acting as directors without formal appointment), and shadow directors (persons whose instructions the board follows).

Question 4

What is a de jure director?

Answer 4

A de jure director is one validly appointed under s 154 CA 2006: at least one natural person for a private company, two for a public company, and not disqualified from appointment.

Question 5

What defines a de facto director?

Answer 5

A de facto director is someone who assumes the functions of a director without formal appointment; they are subject to the same duties and liabilities as de jure directors.

Question 6

What is a shadow director, and why does CA 2006 treat them as directors?

Answer 6

A shadow director is someone whose instructions the board is accustomed to follow (s 251 CA 2006). CA 2006 imposes duties and liabilities on them to prevent misuse of influence.

Question 7

Differentiate between executive and non-executive directors.

Answer 7

Executive directors are employees who work full-time on company business; non-executive directors are officers who provide independent oversight and advice without day-to-day operational roles.

Question 8

What is an alternate director?

Answer 8

An alternate director is appointed (often by resolution) to stand in for an absent director, carrying the same voting powers; their use is discretionary and usually provided for in bespoke articles rather than Model Articles.

Question 9

Is a company secretary required for private companies?

Answer 9

No. Under s 270 CA 2006, private companies are not required to have a secretary unless their articles stipulate; if none is appointed, directors fulfill the secretary’s functions.

Question 10

What qualifications must a public company secretary have?

Answer 10

Under s 273 CA 2006, a public company secretary must have requisite knowledge and experience—often a corporate lawyer or chartered accountant—and be appointed by the directors.

Question 11

How are directors appointed under Model Articles?

Answer 11

Directors may be appointed by ordinary resolution of shareholders (MA 17(1)(a)) or by decision of existing directors (MA 17(1)(b)), unless the company’s articles specify another procedure.

Question 12

Can an executive director also be a shareholder and an employee?

Answer 12

Yes; these are distinct roles. An individual can simultaneously be a director (officer), a shareholder (owner), and an employee under a service contract.

Question 13

What information about directors is kept on the public register at Companies House?

Answer 13

The register must include name, any former name, service address (which may be the registered office), usual country of residence, nationality, business occupation, and date of birth (s 163 CA 2006).

Question 14

Where are residential addresses of directors stored, and can the public access them?

Answer 14

Residential addresses are recorded on a separate secure register under s 165 CA 2006, which is not publicly accessible; only the service address appears on the public register.

Question 15

What disclosures about directors must appear in a company’s annual accounts?

Answer 15

Under s 412 CA 2006, accounts must disclose directors’ salaries, bonuses, pension entitlements, compensation for loss of office, and payments to connected persons. Section 413 requires disclosure of advances, credits, and guarantees to directors.

Question 16

By what process can shareholders remove a director?

Answer 16

Under s 168 CA 2006, shareholders can remove a director by ordinary resolution at a general meeting, provided 28 days’ special notice is given; the director has the right to be heard before removal.

Question 17

List four ways in which a director may vacate office other than removal by shareholders.

Answer 17

Resignation (MA 18(f)); automatic termination if disqualified, subject to IVA/bankruptcy, or certified incapacitated for >3 months (MA 18); retirement by rotation (for public companies/annual re-election); disqualification under CDDA 1986.

Question 18

What are the primary statutory duties of directors under CA 2006?

Answer 18

Sections 171–177 CA 2006 codify: (1) duty to act within powers (s 171), (2) duty to promote success of the company (s 172), (3) duty to exercise independent judgment (s 173), (4) duty to exercise reasonable care, skill and diligence (s 174), (5) duty to avoid conflicts of interest (s 175), (6) duty not to accept benefits from third parties (s 176), and (7) duty to declare any interest in a proposed transaction (s 177).

Question 19

What does the duty to act within powers (s 171) require of a director?

Answer 19

Directors must act in accordance with the company’s constitution (articles and valid shareholder resolutions) and only exercise powers for the purposes for which they were conferred.

Question 20

What are directors obligated to consider under s 172 CA 2006 when promoting the success of the company?

Answer 20

Directors must act in good faith to promote success for the benefit of members, having regard to: long-term consequences; employees; relationships with suppliers/customers; community/environmental impact; reputation for high standards; fairness between members; and other factors in s 172(1).

Question 21

Why is s 172 called the ‘enlightened shareholder value’ duty?

Answer 21

Because it requires directors to balance shareholder interests with stakeholder concerns (employees, environment, reputation), aiming for long-term value rather than short-term profit.

Question 22

What does the duty to exercise independent judgment (s 173) prohibit?

Answer 22

Directors must not fetter their discretion or blindly follow others; they can rely on professional advice but must make their own informed, independent decisions in the company’s interests.

Question 23

How is the duty of care, skill and diligence (s 174) assessed?

Answer 23

Objectively: the care a reasonably diligent person with the general knowledge, skill and experience expected of a director would exhibit. Subjectively: any higher standard based on the director’s actual knowledge, skill, and experience.

Question 24

What constitutes a breach of s 175 (duty to avoid conflicts of interest)?

Answer 24

Directors must not place themselves in situations where their personal interests (direct or indirect) conflict with the company’s interests, unless the situation cannot reasonably give rise to conflict or is authorized by the board (s 175(3)–(4)).

Question 25

Under s 176 CA 2006, when may a director accept a benefit from a third party?

Answer 25

Directors must not accept benefits conferred by reason of being a director or doing/omitting something as director, unless it cannot reasonably cause a conflict. There is no board authorization exception; only shareholder ratification can override.

Question 26

What must a director do under s 177 when interested in a proposed transaction?

Answer 26

Before the company enters the transaction, the director must declare the nature and extent of their direct or indirect interest to the other directors (s 177(2)), either at a board meeting or by written notice.

Question 27

How can a director give a general notice of interest under s 185?

Answer 27

A director may give a written notice stating that they have an interest in a specified body corporate or person (s 185(2)), and thereafter are deemed interested in any transaction with that entity unless the board knows otherwise.

Question 28

When is a director not required to declare an interest under s 177(5)–(6)?

Answer 28

When the director is unaware of the interest; the interest cannot reasonably give rise to conflict or other directors are already aware; or the conflict arises from the director’s service contract under board consideration.

Question 29

What effect does Model Articles MA 14 have on a director with a declared interest?

Answer 29

MA 14 prohibits an interested director from voting on or counting toward the quorum for board resolutions concerning that transaction, subject to exceptions (e.g., other directors authorize, conflict unlikely, or permitted cause under MA 14(4)).

Question 30

What remedies are available for breach of directors’ duties under CA 2006?

Answer 30

For breach of s 174 (care, skill, diligence): damages. For breaches of ss 171–173 and 175–177: injunction, setting aside transaction, restitution/account of profits, restoration of company property, and damages.

Question 31

How can shareholders authorize or ratify conduct that would otherwise breach directors’ duties?

Answer 31

Under s 180(4), the company may give authority (e.g., by board or shareholder resolution) for conduct that would breach duties. Under s 239, shareholders can ratify negligence, default, breach of duty, and breach of trust by ordinary resolution, excluding their own votes if connected.

Question 32

When is shareholder approval required for a director’s long-term service contract?

Answer 32

Under s 188 CA 2006, any service contract with a guaranteed term over two years (where the company cannot terminate or only in limited circumstances) or a notice period over two years must be approved by ordinary resolution of shareholders.

Question 33

What exceptions exist to s 188 for long-term service contracts?

Answer 33

Under s 188(6)(b), wholly-owned subsidiaries do not require shareholder approval for long-term service contracts. If the director serves a holding company, both levels require approval (s 188(2)(b)).

Question 34

What are the consequences if a long-term service contract is entered into without approval?

Answer 34

Under s 189 CA 2006, the offending provisions are void and the contract is deemed terminable on reasonable notice by the company.

Question 35

What inspection rights do members have regarding directors’ service contracts?

Answer 35

Under s 228 CA 2006, companies must keep copies (or memoranda if unwritten) of directors’ service contracts at the registered office for one year after termination; members may inspect free of charge or get a copy for a fee (s 229).

Question 36

When must a memorandum of the proposed long-term service contract be made available to members?

Answer 36

When proposing an ordinary resolution under s 188, a memorandum of the contract must be available at the registered office for at least 15 days ending on the meeting date and at the meeting itself, or annexed to a written resolution.

Question 37

What qualifies as a substantial property transaction under CA 2006?

Answer 37

Under s 190, any acquisition or disposal of a non-cash asset by the company to/from a director, director of a holding company, or connected person, if the asset’s value exceeds £100,000 or >10% of net assets (between £5,000 and £100,000), must be approved.

Question 38

How is ‘connected person’ defined for substantial property transactions?

Answer 38

Sections 252–254 CA 2006 define connected persons to include family members (spouse, civil partner, parents, children), companies in which the director controls ≥20%, business partners, and trustees of trusts benefiting the director or their connected persons.

Question 39

Which exceptions apply to the shareholder approval requirement for substantial property transactions?

Answer 39

Under s 190(4)(b), wholly-owned subsidiaries are exempt. Under s 192, certain transactions—e.g., sale back of shares by a director acting as shareholder—are excluded.

Question 40

What remedies apply if a substantial property transaction proceeds without approval?

Answer 40

Under s 195(2), the company may avoid the transaction unless restitution is impossible, the company is indemnified, or third-party rights would be prejudiced. Directors and connected persons may account for profits and indemnify losses (s 195(3)).

Question 41

When are directors or connected persons not liable under s 195 for unapproved property transactions?

Answer 41

Under s 195(6), if they can show they took all reasonable steps to ensure compliance. Under s 195(7), if they genuinely did not know of circumstances constituting the contravention.

Question 42

What approvals are required for loans to directors under CA 2006?

Answer 42

Under s 197, all companies need shareholder approval for loans to directors or guarantees/security for director loans. PLCs and associated companies need approval for loans, quasi-loans (s 198), credit transactions (s 201), and loans to connected persons (s 200).

Question 43

What is a quasi-loan under CA 2006?

Answer 43

A quasi-loan (s 198) is when the company pays a third party on behalf of a director on terms that the director will reimburse the company (e.g., paying a contractor to renovate a director’s home, with reimbursement later).

Question 44

Define a credit transaction under CA 2006.

Answer 44

Under s 201, a credit transaction occurs when the company supplies goods or services to a director on credit terms (payment deferred or instalments), making it subject to approval in PLCs or associated companies.

Question 45

What exceptions exist to shareholder approval for director-related loans?

Answer 45

Sections 204–209 provide exceptions: expenditure on company business (≤£50,000), loans to defend legal or regulatory proceedings, minor transactions (loans/quasi-loans ≤£10,000, credit transactions ≤£15,000), intra-group transactions, and lending by finance businesses.

Question 46

What are the consequences if a loan to a director proceeds without required approval?

Answer 46

Under s 213(2), the transaction is voidable unless restitution is impossible, the company is indemnified, or third-party rights would be prejudiced. Under s 213(3), directors and connected persons must account for profits and indemnify losses.

Question 47

What defences are available under s 213 for loans to directors?

Answer 47

Under s 213(6), a director is not liable if they took all reasonable steps to ensure compliance. Under s 213(7), a director or connected person is not liable if unaware of circumstances constituting the breach.

Question 48

How does MA 14 interact with s 177 disclosures for loans or property transactions?

Answer 48

MA 14 prohibits interested directors from voting or counting toward quorum on board resolutions relating to transactions in which they have an interest, unless the conflict is authorized, unlikely to give rise to conflict, or permitted by MA 14(4).