Chapter 12 - Director's Duties

Question 1

To whom does a director owe his or her duties?

Answer 1

To the company, as in s 170 CA.

Question 2

Explain the term ‘enlightened shareholder value’.

Answer 2

Enlightened shareholder value refers to the duty of directors to promote the success of the company for the benefit of its members as a whole, while having due regard to other stakeholders. 9s 172)

Question 3

When, and to what extent, are directors required to take the interests of creditors into account when managing a company?

Answer 3

S 172(3) requires directors to have regard for interests of creditors. This is most important when the company has no residual wealth remaining (i.e. on insolvency). However, the duty is still` owed to the company,, just with the creditors in mind.

Question 4

What is the requirement under s 171 CA?

Answer 4

Duty to act within powers:

• according to the company’s constitution
• only exercise the powers for the purpose for which they were conferred.

Question 5

What is the requirement under s 172 CA?

Answer 5

Duty to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have due regard to:

• long term consequences
• interests of employees
• fostering business relationships
• impact on community and environment
• maintaining a high reputation
• the need to act fairly as between members.

Question 6

What is the requirement under s 173 CA?

Answer 6

Duty to exercise independent judgement

Question 7

Is a nominee director entitled to put the interests of his nominator ahead of his duty to the company?

Answer 7

No, he must exercise independent judgement.

Question 8

What is the requirement under s 174 CA?

Answer 8

Duty to exercise reasonable care, skill and diligence:

• this means the care, skill and diligence that would be exercised by a reasonably diligent person with:
  
  • the care, skill and diligence expected of a person carrying out the function of a director,
  • the general knowledge, skill and experience that the director has.

Question 9

What is the test to determine whether or not a director has demonstrated the standard of skill, care and diligence required by CA s 174?

Answer 9

3 factors must be considered:

• the functions of the director
• the nature of the business
• the actual knowledge held by that director.

Question 10

How does the example of Re Barings plc demonstrate a breach of s 174?

Answer 10

Failure to implement effective internal controls, allowing a rogue trader to run the company into debt.

Question 11

What is the requirement under s 175 CA 2006?

Answer 11

Duty to avoid conflicts of interest

• does not include contracts with the company
• must be authorised by the full board
• director’s vote must not be counted in the quorum

Question 12

Can both public and private company boards authorise a director’s conflict of interest?

Answer 12

Private - yes

Public - only if permitted by the articles.

Question 13

Does the duty to avoid conflicts of interest apply to a conflict of interest arising in relation to a director entering into a contract with the company?

Answer 13

No, this is not included.

Question 14

Who may authorise a directors’ conflict of interest?

Answer 14

The board as a whole (except the director concerned, who must abstain.

Question 15

What were the facts in Regal (Hastings) Ltd v Gulliver?

Answer 15

Directors made profits from shares in a newly formed subsidiary, but did not disclose their intention to do so to the members. Held: the directors were in breach of their duty.

Question 16

What is the requirement under s 176 CA 2006?

Answer 16

Duty not to accept third party benefits:

• for reason of his being a director
• for doing anything as a director.

Question 17

What is the requirement under s 177 CA 2006?

Answer 17

Duty to declare interest in proposed transaction or arrangement.

Question 18

What is the requirement under s 182 CA 2006?

Answer 18

Where a director of a company is interested in a transaction or arrangement already entered into by the company, he must declare the nature and extent of his interest (unless already declared under s177).

Question 19

To whom is a director required to declare his or her interest in a contract the company proposes to enter into or which it is already a party.

Answer 19

To the other directors

Question 20

Where are the rules governing the right of a director to vote on a contract with the company in which he has an interest to be found?

Answer 20

In the articles - the model articles state that a director with in interest cannot vote.

Question 21

Identify 4 types of transaction between a director and a company for which member approval is required in advance.

Answer 21

• substantial property transactions (s190-196)
• loans, quasi loans (s197-214)
• long-term service agreements (s188)
• payment for loss of office

Question 22

Which section of the CA governs substantial property transactions?

Answer 22

S 190

Question 23

Under s 190 CA, when is an asset a substantial asset?

Answer 23

Value exceeds £5000 and either:

• 10% of the company’s assets value, or
• £100,000

Question 24

Under s 190 CA, who is a connected person?

Answer 24

• family member of a director
• business partner of a director
• person with shares comprising at least 20% of the company’s capital value

Question 25

When is member approval required for loans to directors?

Answer 25

Always, unless:

• the amount does not exceed £10000
• up to £50000 can be provided to a director to fund expenditure on company business

Question 26

When must members approve directors service contracts?

Answer 26

If they are to be longer than 2 years. (s 188).

Question 27

Is member approval required for payment to a director for loss of office?

Answer 27

Yes, unless it is part of a payment to discharge a legal obligation such as an existing service contract.

Question 28

Have the remedies for breach of directors’ duties been codified?

Answer 28

No, we must look to the relevant common law

Question 29

What are the remedies for breach of the duty of skill care and diligence in s 174?

Answer 29

Damages for breach of duty, provided:

• the loss to the company is not too remote
• a casual link exists between the breach and the loss.

Question 30

Which directors’ duties are subject to equitable remedies?

Answer 30

All except 174.

Question 31

Identify 4 key equitable remedies available for breach of fiduciary duty.

Answer 31

1 Return of property a director received in breach of duty
2 Confiscation/return of any profits made
3 Rescission of contracts
4 Equitable compensation

Question 32

Can a director in breach of his duties be removed from office?

Answer 32

Yes, as per s 168, a director can be removed at any time by ordinary resolution in general meeting.

Question 33

Identify 3 potential sources of authorisation for an act that would otherwise be a breach of directors’ duty.

Answer 33

• directors (for s175)
• members
• provision in the articles

Question 34

Identify two ways of a director obtaining relief after the event when a breach of directors’ duties has occurred.

Answer 34

• ratification by the members

- court-granted relief.