Chapter 2: The Directors Flashcards
1
Q
What is CA2006’s definition of a director?
A
Any person who occupies the position of director, by whatever name called.
Note the act does not say “individual”, it says person which includes corporate bodies that have a legal persona. This allows a company to be appointed a director.
2
Q
What is the difference between a company director and a director.
A
There is a difference in law between someone who holds a directorship of a company, and someone who is simply called a director. Someone who is a director in law has very specific legal obligations regardless of what role he or she plays in the day to day running of the business.
3
Q
Does CA2006 distinguish between different types of directors (exec, NED, and INED) and, if so, what are they?
A
No. The Act does not distinguish and all rights, duties and liabilities set out in the Act apply equally to all directors.
4
Q
List the type of directors.
A
Executive, Non-Executive and Independent Non-Executive, Shadow, De Facto and Alternate.
5
Q
What is an Executive Director?
A
An executive director is a senior company executive who sits on the Board. Typically all directors in a small private company are executive directors.
They are responsible for the day-to-day management of the company and the formulation of policities and initiatives to implement the strategy agreed upon by the Board.
6
Q
How is an Executive Director appointed?
A
Appointment of Exec Directors is governed by the company’s Articles, giving directors authority to appoint/remove directors, determine the terms of their appointment and delegate powers of teh board as may be desired.
7
Q
Where does Director’s authority derive from?
A
The Act; The Company Articles; the Service (employment contracts) Agreement with the company detailing their remuneration (inclusive or exclusive of director fees and provisions relating to confidentiality and other provisions of director activity;, or the minutes of the Board Meeting (for small companies) detailing the terms of appointment.
8
Q
What is a Non-Executive Director (NED)?
A
An NED is a director without executive responsibilities within the company; is not an employee of the company, and will therefore not have a service contract with the company. The terms of their appointment will be set out in a letter of appointment.
Their role is to bring expertise, experience and balance to the Board. They also serve as constructive challenge to the exec directors.
9
Q
What is the role of the NED?
A
- Contribute skills and experience to board decision-making that may not be otherwise available;
- Provide balance and challenge proposals brought forward by the Executive team.
10
Q
What is an Independent NED (INED) and why is it important to have over 50% of the board be INEDs (Governance Code Recommendation)?
A
An INED is an NED that is independent from the company and its management. It is important to have more than 50% of the board as INEDs as it will provide a firm foundation to challenge the Executive Team. The balance between Executive and NEDs is a key tenet of good corporate governance practice.
11
Q
What can impair or appears to impair a NEDs independence?
A
If the NED has:
1. been an employee of the group/company within the last five years;
2. had a material business relationship with the group/company within the last three years, be it as a supplier, shareholder, partner, director or senior employee, or of a body that has had a material relationship with the group/company;
3. receives or has received additional remuneration outside of the director’s fee, participates in the company’s share options or a performance related pay scheme, or is a member of the company’s pension scheme;
4. has close family ties with the company’s advisers, directors or senior employees;
5. represents a significant shareholder;
6, holds cross-directorship or has significant links with other directors through involvement in other companies/bodies;
7. has served on the board for more than nine years from the date of their first appointment.
12
Q
What is a Shadow Director?
A
A shadow director is a person who has not been formally appointed as a director, and does not openly participate in managing the company, however the appointed directors often act upon their instructions. This person will actively try to conceal their involvement with the company.
13
Q
When can someone be deemed a shadow director and are they deemed a director per CA2006?
A
This can occur where perhaps a majority shareholder is not a director, or where advisers are advising on wide-ranging matters outside of their prescribed expertise and directors often act upon or take their advice.
CA2006 views a shadow director as a director for all purposes therefore a shadow director will be as liable as appointed directors per all legislation, e.g. CA2006 and insolvency laws.
14
Q
What is a De Facto Director and how do they differ from a shadow director?
A
A de facto director is a person who has not been appointed as a director, however they hold themselves out to be a director and carry out the duties and responsibilities of a director. A de facto director is also deemed to be a director for all purposes (CA2006 s. 250).
A de facto director actively holds themselves out to be a director, whereas a shadow director conceals their involvement with the management of the company.
15
Q
Are Shadow and de facto directors as liable as appointed directors in matters of the company?
A
Yes. The Act views them as directors for all purposes.
16
Q
What is an alternate director?
A
An alternate director is:
1. Someone appointed by a current company director to act on their behalf in their absence.
2. Their appointment may be revoked by the appointing director at any time by notice in writing to the company. An alternate may also resign by writing in notice;
3. They will cease to be an alternate should the appointing director no longer hold office.
17
Q
Explain where authority to appoint an alternate lies.
A
The Act has no provisions to appoint an alternate, these may be appointed only if the Articles specifically permit it.
Model Articles makes provision for an alternate either by appointing another director or appointing a person approved by the Board. Such appointment is made in writing signed by the appointing director, and must contain a statement signed by the proposed alternate confirming their willingness to act as alternate. Articles for private companies and Companies limited by guarantee do not provide for alternates.
18
Q
Are alternates different to directors according to the Act? What are the procedures to appoint an alternate.
A
They are included in the definition of director in the Act and must therefore be entered into the register of directors and details of their appointment notified to the Registrar using Form AP01. This form does not differentiate between a director and alternate and the term “Alternate Director” can be included.
Appointment and termination of alternates must be notified to Companies House on Form AP01 and TM01 as soon as is possible, unless the alternate is also a director in their own right.
19
Q
What rules are alternate directors subject to?
A
An alternate is subject to the same rules and provisions in the Act. They hold all the rights and authorities as a director, however these rights are only held when the appointed director is absent. It is not a complete assignment of office and the alternate will be deemed responsible for their own acts and omissions (not deemed an agent of the appointing director).
20
Q
What are the key differences between an executive director and an NED?
A
Exec directors are employees, usually full-time and responsible for implementing company strategy. NEDs are not employees, usually part-time and are responsible for setting corporate goals and strategy.
21
Q
What are the eligibility criteria to appoint a director according to the Act?
A
- There must be at least one natural director appointed at all times (CA2006 s.155);
- The person must be at least 16 years old upon appointment (CA2006 S.157).
Additional eligibility criteria may be found in the company’s Articles.
22
Q
Where can one find eligibility criteria for directors?
A
The Act, Articles (which may contain additional criteria); Industry regulations.
23
Q
Who may be appointed a director?
A
Anyone that meets the criteria set out in the Act, Articles or any industry specific regulations, provided they are not prohibited.
24
Q
What is a prohibited person?
A
Someone who:
a. is bankrupt, unless leave is given by the courts;
b. has a disqualification order against them unless leave has been given by the courts;
c. auditor of the company;
d. director of an insolvent company unless leave is given by the court (Insolvency Act 1986).
25
What additional restrictions can be found in a company's Articles?
a. If a proposed director has a receiving order made against them or if they compound with their creditors generally;
b. Maximum number of directors has been reached.
26
What is the procedure for recruitment of a director?
The Board or nomination committee prepare a job spec and candidate profile, taking into consideration the Equalities Act 2010. Consideration is also given to any imbalances in board diversity. The applicants are then judged on merit. Discrimination is not permitted.
Approval is required for certain regulated industries (financial services; NHS Foundation Trusts; regulated audit firms; solicitor firms). CoSecs are required to make themselves aware of any industry specific regulations for their company.
27
What is the procedure a CoSec should follow prior to the appointment of a director?
Prior to the meeting to consider a shortlist of candidates, the CoSec should circulate:
a. all relevant information about the potential directors;
b. a summary of the proposed remuneration arrangements, including bonus and share incentives if it is an exec director;
c. A summary of the company's remuneration policy to ensure compliance;
d. a draft of the service contract;
e. copies of any regulatory notices/press releases that will be issued upon the appointment.
28
What is a casual vacancy of a directorship?
When there is a vacancy on the board due to death, resignation or termination of a previous director.
29
How is a new director usually appointed?
Depending on the provisions in the articles, a director is usually appointed by resolution in writing or in a General Meeting.
Listed companies can put forward resolutions to be considered at the AGM, provided they are provided six weeks prior to the meeting and the requisite number of shareholders (or shareholders holding the requisite number of shares) are giving the request.
30
Checklist for appointing Directors:
* Written confirmation obtained that appointee consents to being a director (Forms AP01/02 are no longer required to be signed by appointee.
* Board resolves to appoint the director via written resolution or at a meeting.
* CoSec confirms appointment of new director as resolved by the Board.
COSEC Duties:
* Complete Forms AP01/02 and make necessary entry in Register of Directors and Register of Director's residential address. (Full name, residential address, DoB, occupation, nationality). Only month and year of DoB are placed on public record. Registrar must be notified (sent AP01/02) within 14 days of date of appointment.
* Send amended bank mandate and specimen signature to bank, if director will be a bank authority.
* Inform director of any share or other qualifications that must be acquired according to Articles, including time frame.
* Requesting information from director regarding interests in relation to the company, customers or suppliers.
* Director to give notice of interests in shares in the company - these need to be disclosed in the accounts and, for listed company, interests and changes to interests need to be disclosed.
* Inform Director of dates of upcoming board meetings.
* Provide director with all relevant information about the company - Articles, reports, accounts, circulars, etc.
* Find out how director wishes to be paid and obtain PAYE and NI details.
* For Traded companies: provide a copy of the company's security transactions rule and ask director to acknowledge receipt; and notify the Regulatory Information Service (RIS) of the appointment by end of business the day after the decision to appoint; disclose details of the new director's other business activities to RIS within 14 days; disclose any interests in shares of the company to RIS within 5 days.
* Provide press announcement to appropriate publications;
* Notify insurance company of new director appointment (for liability insurance coverage for directors, if applicable), within the prescribed time frame as per the policy;
* Arrange director induction for new director, tailored to their specific need.
31
Why is consent required to act as directors?
It may be difficult to prove that a person has consented to act as a director, and if there is a dispute , application can be made to the Registrar to have the director struck out.
It also highlights the importance of the role and that the director or company secretary formally acknowledge their position.
32
Can a director provide just a an alternative to residential addresses as a service address?
No, a director needs to provide a residential address for identity proof purposes.
An alternative service address can be provided for public record purposes, but the register needs to have the director's residential address. Residential addresses are provided on Form AP01 on appointment. Any changes to residential address is made on form CH01. Companies House will not public residential addresses unless it has reason to believe mail addressed to the prescribed service address is being returned, not being actioned or not being forwarded to the director.
The use of a service address will assist in preventing of identity fraud.
33
What topics should inductions cover for newly appointed directors?
Internal policies and procedures; external legislation; and codes of practice and industry/company specific information. Listed companies should reference the Governance Code and related guidance (these set out recommendations concerning inductions).
34
Why are tailored inductions important for all newly appointed directors, whether they have been directors before?
The induction will introduce the new director to the company's policies and procedures; inform them of their responsibilities, duties and potential liabilities.
35
What is the CoSec's role in director inductions?
The CoSec, under direction from the Chair, arranges induction materials and site visits, and ensures directors are aware of their responsibilities, duties and potential liabilities. CoSecs therefore need an understanding of how the business operates and who will be the most appropriate employee to meet the new director.
36
What are the recommended guidelines per the Code for rotation and re-appointment of directors for Listed companies?
Directors should offer themselves up for reappointment at every AGM.
At the company's first AGM, all directors retire from office and have to be reappointed by members.
37
Per the Articles, what are the rotation and reappointment rules for public companies and private companies that choose to hold AGMs?
Directors that have been appointed by other directors must put themselves forward for reappointment at the next AGM. All directors must put themselves forward for reappointment every three years at the AGM.
38
How many directors should companies have?
A public company should have at least two, a private company should have at least one. All companies should have at least one natural person.
The Articles can increase the minimum number of directors.
39
If the number of directors falls below the minimum number, what should happen?
Directors have the power to fill a casual vacancy via a GM specifically to appoint the new director(s). Should any decisions have been made during the period where there were insufficient directors, it is recommended that the board ratify those decisions once there are sufficient directors.
40
What happens if a director's appointment is found defective?
Upon discovering the defective appointment, the CoSec should work with the Board to rectify the situation. CA2006 provides that any acts made by the person acting as director remain valid, to protect third parties. Members of the company may ratify prior acts of such directors either individually or collectively (especially where the acts of other directors would have become invalid, e.g. quorum).
41
Why should written confirmation be obtained for all directors confirming their consent to act?
A director may dispute their appointment/amend details filed or make an application to the registrar to strike out their appointment (using form RP06). The registrar will liaise with the company to ascertain whether consent was given, and if not, they will be removed as director.
Furthermore, consent includes their agreeing that they understand their responsibilities, duties and potential liabilities.
42
Director's Contracts/Service Agreements:
Director's contract/service agreement where they cannot be terminated on less than a two-year notice period, other than for breach of contract, must be approved by members in a general meeting. The termination period ensures directors do not become too entrenched within the Board and termination payments are not excessive.
Member's approval may given by ordinary resolution passed at a GM, provided a written memorandum stating the terms of the agreement/a copy of the contract are available for inspection at the registered office for a period of no less than 15 days prior to the GM meeting. Companies are required to have all director's contracts available for inspection by members at the registered address.
The Code recommends that listed company director agreements have a notice period of not more than one year.
43
What form should be used to notify the Registrar of the appointment of an individual as a director?
Form AP01.
44
Which statutory registers should be updated on the appointment of a director?
The Register of Directors & Register of Director's Residential Addresses
45
What information should be obtained from a new director?
Full name, DoB, service and residential address; nationality, occupation.
46
Who cannot be appointed as a director?
* Anyone under the age of 16;
* A disqualified person;
* a bankrupt person;
* an auditor or employee of the audit firm;
* a director of an insolvent company cannot be appointed as director of a company with a probitied name without court consent;
* anyone not meeting any specific criteria set out in the articles.
47
Are all directors held collectively responsible for board decisions?
As directors collectively manage the company, they can be held liable for actions as CA2006 treats all directors equally and they all have the same rights, duties and liabilities.
Individual directors may be held to account where they hold particular knowledge or experience on a specific matter, therefore directors cannot hide between collective responsibility to escape liability.
48
Should a director have contrary views to a decision (dissenting director), what options and actions are available to said director to protect their position?
A dissenting director in the UK has several options to protect their position, including documenting their dissent, seeking independent legal advice, resigning, or, in extreme cases, initiating legal action. Each action depends on the nature of the disagreement, the potential risks involved, and the director’s personal or professional obligations. Ensuring that their dissent is formally recorded and considering the broader implications of the decision is key to protecting both their legal position and professional integrity.
49
What is a director's prime duty?
To manage the company for the benefit of its members.
50
Can directors delegate their duties?
A director may delegate some of their powers (to committees or other senior officers) but they cannot delegate their duties. While directors can delegate certain tasks or powers to others, they cannot fully delegate their legal responsibilities. Directors remain ultimately accountable for decisions and actions, even if they delegate tasks to employees, committees, or others.
51
Explain the 7 codified duties of a director per CA2006.
1. Act within their powers (CA2006 s.171)
2. Promote the success of the company (CA2006 s.172)
3. Exercise independent judgement (CA2006 s.173)
4. Exercise reasonable care, skill and diligence (CA2006 s.174)
5. Avoid conflicts of interest (CA2006 s.175)
6. Not to accept benefits from third parties (CA2006 s.176)
7. Declare interests in any proposed transactions or arrangements (CA2006 s.177)
52
Act within their powers (CA2006 s.171)
Act in accordance with the company's constitution (Articles, resolutions and other agreements and decisions) and for purposes for which the powers are conferred.
53
Promote the success of the company (CA2006 s.172)
Act in good faith in a way that will promote the company's success for the benefit of the members, and have regard to:
a. likely consequences of decisions in the long term;
b. interests of the company employees;
c. need to foster the company's business relationships with stakeholders;
d. impact of the company's operations on the community and environment;
e. desirability of the company maintaining a reputation for high standards of business conduct; and
f. need to act fairly as between members of the company.
54
Exercise independent judgement (CA2006 s.173)
The duty of "Exercise independent judgment" under the UK Companies Act 2006 (Section 173) means that a director must make decisions based on their own judgment and not just follow the instructions or opinions of others. In simpler terms, directors are expected to think for themselves, use their own knowledge and experience, and make choices that are best for the company, rather than simply doing what someone else tells them to do. They should avoid being influenced by others if it goes against the company's best interests.
The duty to exercise independent judgment doesn't get broken if:
There’s a valid agreement: If the company has already agreed to something that limits what the directors can do in the future, that's okay. The directors just need to follow that agreement, and it doesn’t mean they're not thinking for themselves.
The company’s rules: If the company’s own rules (its constitution) say how directors should act, following those rules doesn’t break the duty. The directors still need to make decisions based on their own judgment, but they must follow the rules if they exist.
So, directors can still act independently even if agreements or company rules guide their actions.
55
Exercise reasonable care, skill and diligence (CA2006 s.174)
Under Section 174 of the Companies Act 2006 (CA2006), company directors must exercise reasonable care, skill, and diligence when performing their duties.
This means:
Care – Acting responsibly and paying attention to what they’re doing.
Skill – Using the knowledge and abilities expected of someone in their position.
Diligence – Putting in the necessary effort and acting in the company's best interests.
The standard is based on:
What a reasonable person in their role would do (objective test).
What they personally are capable of, based on their skills and experience (subjective test).
In short, directors must act competently and responsibly to help the company succeed.
56
Avoid conflicts of interest (CA2006 s.175)
Directors must avoid situations where they have, or could have, a direct or indirect interest that conflicts with the company's interests. This is especially important when it involves company assets, information, or business opportunities, even if the company itself would not have pursued them (CA2006 s.175(2)).
However, this duty does not apply to conflicts arising from transactions or agreements between the director and the company. A conflict is not considered a breach if the other directors approve it, provided that:
In a private company, approval can be given by a directors' resolution, unless restricted by the company’s Articles.
In a public company, approval can be given by a directors' resolution, but only if the Articles specifically allow it.
For both private and public companies, such authorization is only valid if enough directors are present at the meeting to meet the required quorum, excluding the director with the conflict of interest. Additionally, the conflicted director cannot vote on the matter (CA2006 s.175(6)).
57
Not to accept benefits from third parties (CA2006 s.176)
As a director, you must not accept gifts, money, or favors from people or businesses outside the company if it could influence your decisions or create a conflict of interest.
Why is this important?
Directors should always act in the best interests of the company, not for personal gain.
Accepting benefits could bias their decisions and harm the company.
Are all gifts banned?
Not necessarily. If a benefit is small and doesn’t influence decisions (like a promotional pen or a modest lunch), it’s usually fine. But anything valuable or suspicious should be avoided or disclosed.
Key Takeaway
Directors must stay honest and independent by refusing gifts or favors that could affect their judgment. If in doubt, be transparent and report it!
58
Declare interests in any proposed transactions or arrangements (CA2006 s.177)
Directors should declare the full nature and extent of any direct/indirect interest in proposed transactions or arrangements before these are being entered into. Declarations can be made during a meeting or by notice per CA2006 ss.184 and 185.
Where a previous notification is inaccurate or incomplete, additional notifications need to be made.
Should the director not be aware of their potential interest, transaction or arrangement, then notification is not required.
Should the interest likely not be regarded as a conflict, bearing in mind that the other directors have knowledge of the interest, or where it relates to the director's service contract, then notification is not required.
59
While it is each director’s responsibility to disclose any conflicts of interest or changes in any
conflict it will often fall to the company secretary to remind directors of their responsibility. As
company secretary, what actions and processes can be put in place to ensure directors meet their
obligations to disclose conflicts of interest?
As a company secretary, you play a key role in making sure directors follow the Companies Act 2006 (s.175 & s.177) and the UK Corporate Governance Code when it comes to conflicts of interest. Here’s how you can help:
1. Set Clear Rules
Create a conflict of interest policy explaining what conflicts are and when directors must declare them.
Make sure directors understand their legal duties.
2. Keep a Register of Interests
Maintain an up-to-date record of any personal or business interests that could lead to conflicts.
Ask directors to review and update their details at least once a year.
3. Regular Reminders & Declarations
Add a conflict of interest check as a regular item in board meetings.
Ask directors to confirm or update their interests annually.
Send reminders before key company decisions to ensure nothing is overlooked.
4. Proper Board Meeting Procedures
If a conflict is declared, ensure the director does not take part in discussions or voting.
Record all disclosures and decisions in board meeting minutes.
5. Provide Training & Guidance
Organize training sessions to help directors understand their responsibilities.
Give examples of real-life conflicts and how they should be handled.
6. Monitor & Report Compliance
Regularly review whether directors are following the rules.
Report any issues to the board and ensure they are addressed.
Key Takeaway
By setting clear processes, keeping records, reminding directors, and ensuring proper meeting rules, you help protect the company and ensure directors meet their legal duties.
60
What other circumstances may result in a director being personally liable to the company or third party for breach of duty/statutory offence?
* acting as a director while disqualified, CDDA 1986 s. 15;
* a director of an insolvent company carrying on a business with a company with a prohibited name (name similar to the company that is insolvent) s. 217 Insolvency
Act 1986 (IA1986);
* payment of a dividend or other distribution in contravention of the Act (breach of duty under CA2016 s. 171);
* employing illegal immigrants, s. 8 Asylum and Immigration Act 1996;
* evasion of VAT, ss. 13 and 14, Finance Act 1986;
* fraudulent preference (IA1986 ss. 238–40);
* fraudulent trading (CA2006 s. 993);
* public company trading prior to issue of trading certificate (CA2006 s. 767);
* trading with intent to defraud (IA1986 s. 213);
* wrongful trading (IA1986 s. 214); and
* health and safety offences s. 37 Health and Safety at Work Act 1974 (HSWA1974).
61
What are the seven codified duties of directors based on?
The codified general duties of directors under the Companies Act 2006 (such as the duty to act in the company’s best interests) are based on common law rules and equitable principles. These common law rules have developed over time through court decisions.
The codified duties replace the older common law rules but are still intended to be interpreted and applied in the same way as those rules and principles. In other words, directors' duties under the Companies Act 2006 should be understood in the context of past court judgments.
However, directors' actions are still subject to uncodified common law rules and equitable principles that are not written in the Companies Act. For example, this includes rules about breach of trust (misusing company property or funds) or minority oppression (treating minority shareholders unfairly).
62
What other statutory/regulatory rules might affect a director?
a. Contracts between vendors/stakeholders and the company. Directors should be aware of any actions that may result in a breach and therefore legal action;
b. for public traded companies, additional statutory and regulatory duties.
63
Authority to exercise power:
Directors have authority provided to them by the Articles or overriding provisions in the Act. They are responsible for managing the company's business, meaning they may exercise all the power of the company.
As Directors act as agents of the company and are bound by agency law, it is imperative that the CoSec record full board minutes showing reasoning, factors considered and arguments for and against for any proposed course of action.
64
When can directors incur personal liability?
a. When they have given personal guarantees;
b. If they have not made it clear they are acting as an agent and not in personal capacity;
c. Acting as a director while disqualified;
d. Evading VAT payments;
e. Failing to show company name on correspondence, cheques, etc.;
f. Fraudulent trading;
g. Wrongful trading;
h. Employment workers without valid work permits.
It is quite common now for companies to take out indemnity insurance.
65
Do the members of a company have the right to terminate a director?
Regardless of a director's service contract or the company's Articles, members can remove a director by ordinary resolution at a GM.
66
Do directors have unfettered authority to exercise the company’s powers?
No. Their authority is subject to any provisions in the Articles, their service contract and any authority limits adopted by
the board
67
How many directors may be appointed?
In private companies, no less than one natural person and maximum depends on Articles. In Public companies, no less than two people with one being a natural person, and the limit being set by the Articles.
68
How can a director's role be vacated?
a. by death;
b. by stipulations stated in the Articles (rotation);
c. by statute;
d. by ordinary resolution of the members in a GM.
69
Under what circumstances according to statute may a director's role be vacated?
a. If the director becomes bankrupt, unless the court permits them to continue acting;
b. if the director is disqualified from acting as director by court order. The register of disqualifications is maintained by the Secretary of State and can be inspected by the public at Companies House.
70
What criteria for vacating the role of director can be found in the Articles?
a. Qualifying criteria (minimum shareholding, professional qualification) needing to be met within a certain period. The office would be vacated automatically at the conclusion of the qualifying period.
b. An age limit for directors - the office would be vacated at the next AGM. This may contravene the discrimination legislation under the Equality Act.
c. Resignation - takes effect from the date it is received by the company, unless otherwise stated. It does not need to be accepted by the Board.
d. Absence - if a director is absent for a specified period without approval from the Board.
e. If the director has a receiving order or compounds with their creditors generally.
f. Court orders such on mental disorder grounds. This may be in contravention of the Equality Act.
g. Director is removed from office.
h. Non-reappointment under retirement by rotation.
71
Explain Retirement by Rotation.
Model Articles states that one third of the directors should retire every year. The Act has not general requirement.
The Articles also provide that directors appointed in a casual vacancy or as additional director should be put up for reappointed at the next AGM.
The Code recommends that listed company directors be up for reappointment annually.
72
What is the standard checklist for rotation of directors?
1. All directors must retire and offer themselves up for reappointment at the company's first AGM.
2. At subsequent AGMs one third (or nearest to the number) of directors retire and offer themselves up for appointment.
Directors to retire at any AGM are those that have been in office the longest.
A company may appoint a director in a GM to take the place of a retiring director.
In public companies, resolutions at a GM to appoint directors must be voted individually unless everyone agrees it can be made by a single resolution.
73
How may Members of a public company remove a director?
By Ordinary Resolution which can be written or via AGM.
The members give special notice to the company of the proposed resolution to be considered at the next AGM, which is given no less than 28 days prior to the AGM. This resolution is given to the said director to allow them to make representations in writing and request that these be circulated to members.
The proposal is then considered at the next AGM.
74
How may members of a private company remove a director?
A resolution is provided to the company no less than 28 days prior to the GM. This resolution is considered at the GM.
75
Can the provision of Members removing directors be overriden?
No. It is a statue in the Act.
76
How may a director be disqualified?
Under CDDA1986, automatically, as a result of a specific event, or where application has been made to the court that the person is unfit.
77
What may a disqualified director not do during the disqualification period?
Be a director, auditor, liquidator, receiver or manager of a company (directly or indirectly) without consent from the court.
78
Under what circumstances can a director be disqualified?
Disqualification for:
a. Unfitness - through their actions/inactions; or directors of an insolvent company where their conduct makes them unfit.
b. Conviction - if a person has been convicted of an indictable offence in connection with the management, formation, promotion or liquidation of a company.
c. Breach of statutory obligations - failing to file accounts or confirmation statements or other documents required by Companies House.
d. Fraudulent or wrongful trading;
e. In the public interest - Secretary of State applies to the court on the grounds of public interest - usually happens after an enquiry by the Department of Business, Energy and Industrial Strategy inspectors.
f. Disqualification undertaking - Secretary of State may accept a disqualification undertaking from a person that would otherwise be subject to a disqualification order;
g. Competition Disqualification order: where a person is a director of a company that breaches the Competition law and court considers their conduct unfit. Court must make an order under such circumstances.
h. Competition undertaking: Competition and Markets Authority or other regulatory authority accepts a disqualification undertaking from a person where they believe the company for which the person is a director has committed a breach of competition law and their conduct is unfit.
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Checklist: Vacation of office by a director
a. Letter of resignation received, including details of any subsidiary companies, and details of any fees owing;
b. Listed companies notify the UKLA and make a market announcement immediately;
c. the vacation of office is noted at the next board meeting;
d. Register of directors is updated with date of cessation of directorship;
d. TM01 and TM02 are filled out and sent to Registrar within 14 days of cessation;
e. Fees due up to cessation are paid and P45 completed;
f. Notify director of steps to be taken in relation to share options and bonus arrangements, if applicable;
g. Amend bank mandates, if applicable;
h. Notify regulator if required;
i. Make arrangements for stationery to be amended if directors are listed on stationery;
j. Director returns all company documentation and assets, or confirms the destruction of same if applicable.
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Why is succession planning important?
Ensures orderly succession and maintains the balance of skills, experience, diversity, independence and balance.
It is key to the long term effectiveness of a company.
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What should nominations committees consider when drawing up succession plans?
Skills, expertise, diversity, independence and balance while aligning to deliver the company's strategy currently and in the future.
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What recommendations were made by the Hampton-Alexander review regarding diversity?
a. Companies should have a woman in the role of either CEO, Chair, SID or CFO and investors should support this;
b. Companies should publish a gender pay gap for the board and exec committee;
c. BEIS and Government Equalities Office should coordinate the initiatives government backs on diversity in business;
d. BEIS and GEO should review annually with Investor Association and other investor groups any proposed voting sanctions applied to listed companies that fail to meet the gender diversity targets they have set.
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What is the Parker Review?
The Parker Review is a UK-based independent review focused on improving ethnic diversity on company boards. It was commissioned by the UK government and led by Sir John Parker. The review was first published in 2016 and set recommendations to increase the number of directors from ethnic minority backgrounds in FTSE 100 and FTSE 250 companies.
Key Findings & Recommendations:
One by 2021 (FTSE 100) – At least one board member from an ethnic minority background in every FTSE 100 company by 2021.
One by 2024 (FTSE 250) – At least one ethnic minority director in every FTSE 250 company by 2024.
Annual Progress Reports – The review tracks and reports progress, assessing how companies are improving ethnic representation.
The Parker Review plays a crucial role in promoting boardroom diversity and corporate inclusivity in the UK.
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Why is it important for 'INEDS' to be considered when doing succession planning?
To maintain a proper balance of the board. Under the Code, INEDS should make up 50% of the board, excluding the chair.
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Explain balance when considering succession planning.
Balance refers to the board being balanced in terms of skill, expertise, length of service, diversity and experience.
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What are directors responsible for?
Directors are responsible for managing the company and can be held accountable for their own actions and those of the company.
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Can companies protect directors from legal claims?
Yes, under the Companies Act 2006 (CA2006), companies can indemnify directors and officers against certain legal claims, covering defence costs and damages in civil and criminal proceedings brought by third parties.
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Can a company pay for a director’s legal costs upfront?
Yes, a company can reimburse a director for legal costs before the case is resolved. However, if the director loses, they must repay these costs.
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Are there any limits on indemnity protections?
Yes, companies cannot exempt directors from liability for negligence, misconduct, or breach of duty (CA2006 s.232). Indemnities can only cover costs if the director successfully defends themselves.
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What happens if a company sues its own director?
The company may still cover the director’s defence costs as they arise. However, if the director loses the case, they must personally repay these costs and any damages or fines.
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Do companies need to disclose indemnity provisions?
Yes, details of any indemnities given to directors must be included in the company’s directors’ report (CA2006 s.236). A copy must also be available for shareholders to inspect (CA2006 ss.237-238).
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Can all companies indemnify their directors?
Companies must check their Articles of Association to ensure indemnity is permitted. Standard Model Articles (Plc reg. 85, Ltd reg. 52) allow companies to indemnify directors and officers.
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What is Directors’ & Officers’ (D&O) insurance?
Due to the potential risks directors face, many companies purchase D&O insurance to provide additional protection against legal claims.
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You are the company secretary of Query plc, a listed company, and the board are to consider the
appointment of a new NED.
The chair has requested that you prepare a briefing for the directors on the following matters:
* Can the board appoint the new director?
* Is any external approval required?
* This will be the new director’s first appointment as a director. What are the key details of
directors’ duties they should be informed about?
* How can the board assess the independence of the new director?
Briefing Note: Appointment of a New Non-Executive Director (NED)
To: The Board of Directors, Query plc
From: [Your Name], Company Secretary
Date: [Insert Date]
Subject: Considerations for the Appointment of a New Non-Executive Director
1. Can the Board Appoint the New Director?
Yes, the board has the authority to appoint a Non-Executive Director (NED), subject to the company’s Articles of Association and regulatory requirements:
Board Authority: The Articles typically permit the board to appoint a director until the next AGM, at which point shareholders must confirm the appointment.
Nomination Committee Recommendation: As a listed company, the Nomination Committee should lead the selection process, ensuring that the appointment aligns with the company's needs and diversity considerations.
2. Is Any External Approval Required?
Certain external approvals or disclosures are necessary:
Shareholder Approval: While immediate appointment is possible, shareholders must ratify it at the next AGM.
Regulatory Notifications: As a listed company, Query plc must notify the Financial Conduct Authority (FCA) and the London Stock Exchange (LSE) via an RNS announcement.
Directors’ Interests & Background Checks:
A Companies House filing (Form AP01) is required.
Background checks should be conducted to ensure compliance with the UK Corporate Governance Code and Listing Rules.
The individual must not be disqualified from acting as a director under the Company Directors Disqualification Act 1986.
3. Key Directors’ Duties Under the Companies Act 2006
As this is the new director’s first board position, they should be made aware of their statutory responsibilities under the Companies Act 2006 (CA2006), including:
Duty to Act Within Powers (s.171) – Directors must operate within the company’s Articles of Association and legal framework.
Duty to Promote the Success of the Company (s.172) – Directors must act in good faith, considering stakeholders such as shareholders, employees, customers, and the environment.
Duty to Exercise Independent Judgment (s.173) – Directors must not be unduly influenced by others.
Duty to Exercise Reasonable Care, Skill, and Diligence (s.174) – Directors must demonstrate competence and use their experience effectively.
Duty to Avoid Conflicts of Interest (s.175) – Any actual or potential conflicts must be disclosed.
Duty Not to Accept Benefits from Third Parties (s.176) – Directors must avoid receiving gifts or incentives that could compromise independence.
Duty to Declare Interests in Transactions (s.177) – Directors must disclose any personal interest in a company transaction.
4. Assessing the Independence of the New NED
The board must assess the NED’s independence based on the UK Corporate Governance Code. A director may be deemed non-independent if they:
Have been an employee of the company or group within the last five years.
Have a material business relationship with the company (e.g., significant supplier, consultant).
Receive additional remuneration apart from director fees (e.g., performance-related bonuses).
Have served on the board for more than nine years.
Have close family or personal ties with existing directors or senior executives.
The Nomination Committee should conduct a formal independence assessment and document its findings before recommending the appointment.
Conclusion
The board has the authority to appoint the NED, subject to shareholder approval at the next AGM. Necessary filings must be made with Companies House and regulatory authorities. The new director should be briefed on their statutory duties, and their independence must be assessed to ensure compliance with corporate governance standards.
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Can a person be appointed as a director without their consent, and what does "co-option" mean in this context?
A: No, a person cannot be appointed as a director without their consent, and if appointed without consent, they can apply to the Registrar to have the appointment removed. While the term "co-option" is not used in the Companies Act, it is sometimes informally used to describe the appointment of a director between AGMs, provided that:
The board has the authority to fill casual vacancies.
The person agrees to the appointment.
The appointment does not exceed the maximum number of directors allowed in the Articles of Association.
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Legislative & Other Developments.
The prohibition on appointing or retaining corporate directors under ss. 156A–156C has not yet been enforced. In a 2021 consultation, BEIS proposed banning corporate directors unless their own boards consist solely of natural persons with verified identities. Additional proposals include mandatory identity verification for all directors, People with Significant Control (PSCs), and individuals filing company information.
