Chapter 8 - Companies: ownership and management Flashcards
(120 cards)
1
Q
What are the different types of directors in a company? 7
A
Director (on incorporation or subsequently): Appointed by articles, existing directors, or ordinary resolution.
De facto director: Acts as a director without formal appointment.
Shadow director: Influences the board without being formally part of it.
Alternate director: Appointed to act temporarily in another director’s place.
Executive director: Performs specific executive functions (e.g., finance director).
Non-executive director: Does not perform executive functions, primarily attends board meetings.
Managing director (MD): Handles day-to-day management as per board’s delegation.
2
Q
What are the key points regarding director qualifications and roles? 5
A
- Must be at least 16 years old.
- Must not be disqualified under the Company Directors Disqualification Act 1986 or by articles of association.
- Every company needs at least one director (two for public companies).
- Actions remain valid even if the appointment was defective.
- Changes in directors must be registered with the registrar within 14 days.
3
Q
In what ways can a director leave office? 7
A
Death or company winding up.
Removal via resolution (explained in detail below).
Disqualification (legal ineligibility).
Resignation.
Requirements in the articles of association.
Prohibition by law.
Bankruptcy or medical inability to perform duties.
4
Q
What is the process for removing a director? 5
A
A director can be removed by an ordinary resolution under Section 168.
Special notice (28 days) of the resolution must be given.
The director has the right to attend and address the meeting.
Written representations by the director must be circulated or read at the meeting.
Removal may breach a service contract, allowing the director to sue for damages.
5
Q
How can a director prevent removal? 2
A
- Weighted voting rights in the constitution (e.g., Bushell v Faith 1970) can block removal. - so we vote based on no of shares etc
- Shareholder agreements requiring specific quorums for removal can also safeguard directors.
6
Q
What happens if a removed director holds a service contract?
A
The removal could constitute a breach of the service contract, entitling the director to sue for damages.
7
Q
How are shadow directors treated under the law?
A
Shadow directors are treated as directors if they influence the company significantly, and they bear the same responsibilities and liabilities in such cases.
8
Q
INTERACTIVE QUESTION 17: RESOLUTION FOR THE REMOVAL OF A DIRECTOR
A company has three members who are also directors. Each holds 100 shares. Normally the shares carry one vote each, but the articles state that on a resolution for a director’s removal, the director to be removed should have 3 votes per share. On a resolution for the removal of Jeremy, a director, Jeremy casts 300 votes against the resolution and the other members cast 200 votes for the resolution. Has Jeremy validly defeated the resolution?
A No, the articles are invalid insofar as they purport to confer extra votes.
B Yes, the proceedings and articles are valid.
C Yes. Whilst the articles are invalid and the voting is therefore 200 to 100 in favour, a special resolution is required and the necessary 75% majority has not been obtained.
D No. A director is not entitled to vote on a resolution for his own removal.
A
B Yes, the proceedings and articles are valid.
9
Q
What defines the powers of directors in a company?
A
The powers of directors are defined by the company’s articles and must be exercised properly and within the company’s constitution. Directors are not agents of the members and are not subject to their instruction.
10
Q
How are directors’ powers typically exercised?
A
Powers are vested in directors collectively and are usually exercised in board meetings. Meetings can be held without physical presence if none of the directors reasonably object.
11
Q
What are the restrictions on directors’ powers? 4
A
Statutory (General): Powers must be exercised for their intended purpose.
Statutory (Specific): For actions like altering articles or reducing capital, directors need a special resolution from shareholders.
Articles: Articles may limit the maximum powers directors can exercise, requiring member approval for exceeding those limits.
Members: Members can control or limit directors’ powers through special resolutions or by removing directors from office. MEMBERS HAVE ULTIMATE CONTROL.
12
Q
What are the 3 types of authority a director may have when entering into contracts?
A
Actual authority
Implied authority
Apparent/ostensible authority.
13
Q
What is actual authority?
A
The actions of a director with express authority will bind the company
Authority explicitly given to a director by the company, either expressly (e.g., managing director signing general business contracts)
14
Q
What is implied authority?
A
Managing directors, and to some extent other executive directors (such as sales directors or finance directors), are much more likely to bind the company by their actions, since greater powers are usually delegated to them. Thus a managing director has implied usual authority to make general business contracts on behalf of the company (in addition to any actual authority given to him by the board).
impliedly (e.g., actions customary for their role).
15
Q
What is ostensible authority?
A
Authority that a third party reasonably believes a director has due to the company’s actions or behavior, such as the board permitting a director to act as a managing director.
16
Q
Can a company secretary bind the company with their authority?
A
Yes, but their authority is limited to administrative operations like managing office staff and cannot include significant actions like borrowing money or purchasing land.
17
Q
What does Legislation Section 40 of the Companies Act 2006 state about third-party contracts? 3
A
- A third party is deemed to act in good faith unless proven otherwise.
- Limitations on the director’s authority can be disregarded when dealing with third parties in good faith.
3, Section 40 does not protect transactions involving directors or connected persons, making such transactions voidable.
18
Q
When can limitations on a director’s authority be disregarded under Section 40 legislation?
A
When a third party acts in good faith and is not connected to the company, even if they are aware of the director’s limitations.
19
Q
What happens if a person connected to a director enters into a transaction with the company?
A
The transaction may be voidable, and the connected party may be required to account for any gains and indemnify the company for any losses.
20
Q
What is the general principle of directors’ duties under company law?
A
Directors owe their duties to the company as a whole, not to individual shareholders.
21
Q
What are the key duties directors must fulfill according to the acronym ASPIRIN?
A
Accountability
Success
Powers (Act within them)
Independent Judgment
Reasonable Skill and Care
Interest Declaration
No Benefits
22
Q
ASPIRIN
A
key duties directors ASPIRIN
Accountability
Success
Powers (Act within them)
Independent Judgment
Reasonable Skill and Care
Interest Declaration
No Benefits
23
Q
What does “To act within powers” require from a director?
A
Acting in accordance with the company’s constitution.
Exercising powers only for the purpose for which they were conferred.
24
Q
What happens if directors exercise their powers for a collateral purpose?
A
The transaction becomes invalid unless it is approved or ratified by the company in a general meeting.
25
What is the restriction on voting when directors misuse their powers for share allotment?
Votes attached to new shares issued irregularly cannot be used to influence decisions at the general meeting.
26
How can an irregular transaction by directors be rectified?
Through approval or ratification by the company in a general meeting.
27
How should directors promote the success of the company? 6
By acting in good faith and considering:
Long-term consequences of decisions.
Employees’ interests.
Relationships with suppliers, customers, and others.
Impact on the community and environment.
Reputation for high standards of business conduct.
Acting fairly among members.
28
How must directors exercise independent judgment?
By making their own decisions, except where:
The company constitution restricts them, or
Agreements legally limit their discretion.
29
What defines reasonable skill and care for a director?
General skill and experience expected of a reasonably diligent person.
Actual knowledge, skill, and experience the director possesses.
30
What is the duty to avoid conflicts of interest?
Directors must avoid situations where their personal interests conflict with company duties unless authorized.
31
Under what conditions is a conflict of interest not considered a breach of duty? 2
In a private company, if the company’s constitution does not invalidate such authorization.
In a public company, if the company’s constitution expressly allows such authorization.
32
Can a director vote on a matter where they have a conflict of interest?
No, the relevant director cannot count towards a quorum, and their votes will not be included in determining whether authorization is given.
33
When does the duty to avoid a conflict of interest not apply?
This duty does not apply when the director has declared their interest in a proposed transaction.
34
What must a director do when they recognize a potential conflict of interest?
They must disclose their interest to the company, as failure to do so can result in a breach of their fiduciary duties.
35
What does the duty not to accept benefits from third parties entail?
A director cannot accept benefits:
- Due to their role as a director.
- By doing (or not doing) anything as a director.
Exceptions occur if the benefit cannot reasonably be regarded as likely to cause a conflict of interest.
36
How should a director declare an interest in a proposed transaction?
The director must declare the nature and extent of their interest:
1. At a board meeting.
2. By notice in writing.
3. Through a general notice of interest.
Declarations are not needed if the company's constitution does not require it, or if it involves a substantial non-cash asset transfer. - ask 'what would a reasonable person think' 'would you be influenced by the gift, if so don't accept'
37
Directors must declare the nature and extent of any such interest (direct or indirect) to the other directors, unless it cannot reasonably be regarded as likely to give rise to a conflict of interest. How can they do this? 3
Even when such declaration is made, there is no need for approval by the members or the board, unless: 2
The notice may be made:
At a board meeting
By notice in writing or
By a general notice, i.e. that he has an interest in the third party and is therefore to be regarded as interested in any transaction or arrangement with that third party (in which case he should take reasonable steps to ensure that such general notice is brought up at the next board meeting).
Even when such declaration is made, there is no need for approval by the members or the board, unless:
The company's constitution requires it or,
Unless it is an arrangement between a director and the company for the transfer of a ‘substantial non-cash asset’
38
What are the consequences if a director breaches their duties? 5
The director may be required to:
Make good any loss suffered by the company.
Surrender any secret profits.
Face voidable contracts.
Return property taken from the company.
Be subject to injunctions for ongoing breaches.
Multiple directors in breach share joint and several liabilities.
39
What are the responsibilities of administrators, receivers, and liquidators under statutory controls on directors' behavior?
They must assess whether to apply to the court for an order under wrongful or fraudulent trading rules, requiring directors to contribute to company assets as deemed "just and reasonable."
40
Who do administrators, receivers, and liquidators have a statutory duty to report to if the company is being mismanaged?
They also have a statutory duty to report to the Department for Business, Innovation and Skills (BIS) on directors of companies in whose affairs they have become involved, where they believe the conditions for a disqualification order have been satisfied.
41
When must the Secretary of State apply to the court for disqualification of directors?
Within two years of the company becoming insolvent, if conditions for a disqualification order are met.
42
Define wrongful trading.
When a company goes into insolvent liquidation, and the director(s) knew or should have known that there was no reasonable prospect of avoiding this outcome.
43
What standard is applied to assess wrongful trading?
The standard of a reasonably diligent person with expected knowledge, skill, and experience of a comparable director.
The standard expected of a listed company director would be higher than for the director of a small owner-managed private company.
44
What is the consequence for directors found guilty of wrongful trading under Section 214?
The court may order them to make contributions to the company’s assets as deemed appropriate.
Where a director is liable under s 214 the court can order him to 'make such contribution to the assets of the company as the court thinks proper'.
45
Define fraudulent trading.
When a company’s business is carried out with intent to defraud creditors or for fraudulent purposes.
46
What constitutes "carrying on business" in fraudulent trading cases?
A single transaction or payment of debts qualifies as carrying on business.
47
What are the consequences of fraudulent trading?
Criminal Offense: Punishable by up to 10 years of imprisonment and/or a fine.
Civil Offense: Court may order contributions to the company’s assets.
48
What is the purpose of the Company Directors Disqualification Act (CDDA) 1986?
To prevent directors of failed companies from managing other companies without personal liability.
49
What are grounds for disqualification for up to 15 years?
Serious offenses, fraudulent trading, Secretary of State’s application, breaches of competition law, or wrongful trading participation.
50
What are grounds for disqualification for up to 5 years?
Persistent default in complying with company legislation (e.g., three convictions in five years).
51
What are grounds for mandatory disqualification (2 to 15 years)?
nsolvency-related misconduct, even if the director took no active part in the company’s operations.
52
What alternative to disqualification may the Secretary of State accept?
Undertakings by the director to refrain from managing companies in uncontested cases.
53
What are the consequences of breaching a disqualification order?
What are the consequences of breaching a disqualification order?
54
What factors may reduce the disqualification period?
Lack of dishonesty, personal financial loss, absence of excessive remuneration, mitigation efforts, and low reoffending likelihood.
55
Who qualifies as a member of a company?
Anyone listed in the company’s register of members, typically referred to as shareholders when they own shares.
56
What governs the regulation of members?
Members are bound by the company’s articles of association, which act as a binding contract among members and the company.
57
What are the key rights of a member? 2
To receive annual accounts and reports.
To require directors to call a general meeting.
58
What actions require member approval for directors? 4
Directors' service contracts longer than 2 years.
Substantial property transactions.
Loans to directors.
Payments for loss of office.
59
What are the consequences of a breach in member approval requirements? 3
Contracts may be terminated.
Transactions are voidable unless approved.
Directors may be held accountable for losses.
60
Minority protection - Can minority shareholders sue?
What exceptions exist to the rule in Foss v Harbottle?
Minority shareholders cannot sue if their grievances can be resolved by a majority vote, as the company itself is the correct claimant. But there are exceptions.
What exceptions exist to the rule in Foss v Harbottle?
Actions that are ultra vires.
Fraud on the minority.
Breach of personal rights of members.
Directors acting illegally.
61
HIGHLY EXAMINABLE
Minority protection - Where statute gives specific powers- 5
Cancellation of variation of class rights
≥15% of class of shares
Right to call a company meeting
≥5% of shares
Notice of members' resolutions
≥5% of shares
Payment out of capital by private company for the redemption or purchase of its shares
Any shareholder (or creditor) can apply to court to prohibit this
Registration of limited company as unlimited
Any member can prevent this
62
What is a derivative action?
A member's right to sue on behalf of the company for director negligence, default, or breach of duty.
63
What factors does the court consider for derivative actions? 6
Whether the member is acting in good faith
The importance that a person promoting the success of the company would attach to it
Whether authorisation or ratification by the company by the company is likely
Whether the company has decided not to pursue the claim
Whether its member could pursue the claim in his own right rather than on behalf of the company
The views of members with no personal interest in the matter
64
What constitutes unfairly prejudicial conduct?
Actions that harm the interests of members, such as exclusion from management, misuse of funds, or improper share allotments.
65
What factors are NOT considered unfairly prejudicial conduct? 4
Failure to pay debts of a subsidiary.
Complying with Stock Exchange rules.
Reasonable offers to buy minority shares.
Complaints based on employment issues.
66
What are the consequences of a successful unfair prejudice petition? 5
Regulating future company affairs.
Allowing legal proceedings.
Requiring specific actions or prohibitions.
Purchasing shares at a fair value.
Requiring the company to make any (specified) alterations to its articles, or not to make such alterations without leave of the court
67
What does "just and equitable winding up" mean?
It refers to a member's right to petition the court for the dissolution of a company when they are dissatisfied with the management or conduct of directors or controlling shareholders, provided no other remedies are available
68
Why is just and equitable winding up considered a remedy of last resort?
Because it involves winding up a potentially viable company, which is a drastic measure, only taken when no other solutions can address the grievances.
69
Under what circumstances might a company be wound up on just and equitable grounds? 3
If the company was formed for an illegal or fraudulent purpose.
If there is a complete deadlock in management, making decision-making impossible.
If directors deliberately withhold information, eroding shareholders' confidence in the management
70
Why is a deadlock in management considered grounds for just and equitable winding up?
Because a complete deadlock prevents the company from operating effectively, leaving no alternative for resolving disputes.
71
How does withholding information by directors lead to just and equitable winding up?
If directors deliberately conceal important information, it can undermine trust and confidence among shareholders, making continued operation of the company untenable.
72
Who can call a general meeting and what are the notice requirements? 3
Company Director: 14 days' clear notice, reduced if 90% (95% for PLCs) of shareholders consent to short notice.
Members with ≥5% shares: Must give directors 21 days' notice, and the meeting must occur within 28 days.
Auditor: If resigning, they must provide a statement of circumstances and request a meeting.
73
When can the court or a PLC in crisis call a general meeting? 2
Court: On its own motion or at the request of a shareholder.
PLC in crisis: When net assets fall to half or less of the called-up share capital.
74
What is the requirement for AGMs in public companies?
A public company must hold an AGM:
Every financial year.
Within six months after the accounting reference date.
Failure to comply may result in fines.
75
What is the notice period for an AGM, and can it be shortened?
The notice period is 21 days, but all members can consent to short notice.
76
What is the notice period for an AGM, and can it be shortened?
The notice period is 21 days, but all members can consent to short notice.
77
What are the main business items addressed in an AGM? 3
Appointment of directors and auditors.
Approval of accounts.
Approval of dividends.
78
What majority is needed for an ordinary resolution, and what is it used for?
Requires >50% majority and is used for general business not requiring a special resolution.
79
What majority is needed for a special resolution, and what is it used for?
Requires ≥75% majority and is used for:
Change of name.
Alteration of articles.
Reduction of share capital.
Winding up the company.
80
What are the requirements for a special resolution? 2
The resolution text must be included with the meeting notice.
Must be filed with the Registrar within 15 days.
81
What is a written resolution, and what timeframe applies to private companies?
Used by private companies for most business matters.
Must be passed within 28 days of circulation.
Requisite majority must be reached, and decisions cannot be changed after the vote.
82
What can not be in a written representation (private companies)? 2
Anything relating to removal of director or auditor
83
When is special notice required, and what is the timeframe?
Special notice requires 28 days' notice for the removal of a director or auditor.
84
When sending notice for an AGM meeting what days do we not count?
Notice periods exclude the day the notice is given and the day of the meeting
85
Do parents company have liability to pay debts of a subsidiary?
No liability as they are separate entities therefore liable for their own debt
86
What does 'diversion of a company's business to a director controlled company' mean?
Shareholders essentially left with a shell company with noting in t when all the lucrative business has gone through a different company's returns are diminished
87
If notice is given post for AGMs how long should be given to allow post to arrive?
48hrs
88
What does a statement of the circumstances state - given by an auditor when they resign?
Can either say
1. 'nothing special to bring to attention of shareholders, we have decided to resign ....' - could be a familiarity risk as worked with company for too long
OR
2. State why they feel they have to resign
89
What is the minimum quorum required for meetings under the Companies Act?
A minimum of 2 members, unless the company has only one member.
90
How are votes cast initially at a meeting?
Votes are cast by a show of hands unless a poll vote is demanded.
91
What is a poll vote?
Shareholders might have more shares may request this as a vote
so 10 shares = 10 votes has more weight than 1 share
Each member (or proxy) casts votes proportional to their shareholding as per the company’s articles, and the show of hands vote is disregarded.
92
How long must records of meetings be kept, and what should they include?
Records must be kept for 10 years and include minutes and resolutions, available for inspection by members.
93
What are class meetings, and when are they held?
Class meetings are held for specific classes of shareholders or debenture holders when a company has different share classes. Statutory provisions for meetings and resolutions also apply.
94
Can a single member conduct business without formal notice or minutes?
Yes, a single member can conduct business informally, but they must provide a written record of decisions made.
95
What must a single member comply with when conducting business?
They must comply with normal filing requirements, ensuring written resolutions are recorded.
96
INTERACTIVE QUESTION 19: UNFAIRLY PREJUDICIAL CONDUCT
Are the following likely to amount to unfairly prejudicial conduct under s 994 CA'06?
YES OR NO
A Failure of a parent company to pay the debts of its subsidiary.
B Diversion of the company's business to a director-controlled company.
C Failure to call a general meeting.
D Late presentation of the company's accounts.
A No
B Yes
C Yes
D No
97
Worked example 18: Director’s duties
Xray Ltd intends to enter into a contract for the supply of medical supplies from a firm in which Xavier, a director of Xray Ltd, is a partner. The terms of the contract are no less onerous than those of contracts between the company and other suppliers, but nonetheless Xavier is concerned that he may commit an offence if the contract goes ahead due to his interest in the firm.
Advise Xavier.
Xavier is under a duty to avoid any situation in which he has an interest that, even potentially, conflicts with the company's interests, even if the company is not actually prejudiced as a result (it may even fair better as a result). However, this duty does not apply to a conflict of interest arising in relation to a transaction with the company, as is the case here. The relevant duty, with which Xavier must comply, is a duty to disclose his interest to the other directors pursuant to s 177. He should make such disclosure at a board meeting or in writing. He could provide a general disclosure of the nature and extent of his interest in the firm, so that he is to be regarded as interested in any transaction with it. Such general notice should be given at a board meeting or brought up at the next meeting following it. If he fails to do so, the contract will be voidable at the instance of the company and he could be liable to indemnify the company against any loss.
98
2 Are the following statements true or false?
LO 2k, 2l
A sole director may also be company secretary but cannot also hold the position of the company’s auditor.
A True
B False
Subject to specific exceptions, a director should be at least 18 years old.
C True
D False
LO 2k
Correct answer(s): A True
A sole director can be a company secretary but not a company auditor.
Correct answer(s): D False
Under s.157 of the Companies Act 2006 a person may not be appointed a director of a company unless they are at least 16 years old.
99
3 Bertie and Connie each own 30% of the shares in Vintage Cars Ltd. Digby owns 20% and Noel, the finance director, owns 20%. Bertie and Connie have become increasingly frustrated by Noel’s apparent lack of vision for the company and are annoyed by a number of silly mistakes that he has made recently. They wish to remove him from the board of directors. Digby is undecided.
Requirements
Can Bertie and Connie remove Noel from the board without Digby’s support?
A Yes
B No
If Noel is removed from office, will his removal effect a lawful termination of his service contract as finance director?
C Yes
D No
LO 2k
Correct answer(s): A Yes
A director can be removed on the passing of an ordinary resolution (with special notice).
Correct answer(s): D No
He may be entitled to sue for breach of contract as a result.
100
4 Simone and her fellow directors Mark and Tia each own 100 of the 300 shares in Simple Pies Ltd. Under the articles of association, where a resolution is proposed to remove a director, that director is entitled to three votes per share. Mark and Tia vote to remove Simone but when a poll is taken, Simone defeats the resolution by 300 votes to 200.
Requirement
Which of the following best describes the legal position?
A Simone has not been removed because the weighted voting rights have been validly given and validly exercised.
B Simone has been removed because the article giving weighted voting rights contravenes the Companies Act 2006 which enables a director to be removed on the passing of an ordinary resolution with special notice.
C Simone has not been validly removed because the articles would effectively mean that a director could never be removed.
D Simone has been validly removed because voting should not have been conducted by a poll on a resolution to remove a director.
LO 2k
Correct answer(s): A Simone has not been removed because the weighted voting rights have been validly given and validly exercised.
The facts are similar to those in Bushell v Faith where the House of Lords held that since shares may be issued with such rights as the company determines, there was nothing to stop a company giving weighted voting rights in this manner.
101
5 Are the following statements true or false?
A company must state its objects in its constitution because directors can only exercise their powers in pursuance of those objects.
A True
B False
Directors are agents of the members of the company for the purposes of managing the company’s business.
C True
D False
LO 2m
Correct answer(s): B False
The Companies Act 2006 changed the previous law to provide that companies have unrestricted objects unless specifically restricted by the articles.
Correct answer(s): D False
Directors are not agents of the members and, therefore, are not subject to their instruction as to how to act.
102
9 Are the following statements true or false?
LO 2m
The statutory duty of a director to disclose any interest that they have in a proposed transaction or arrangement with the company does not apply to shadow directors.
A True
B False
A director may not exercise their powers except for the purpose for which they were conferred.
C True
D False
LO 2l
Correct answer(s): B False
All the directors’ duties in the Companies Act 2006 are stated to apply to shadow directors also.
Correct answer(s): C True
103
13 The managing director of King Kitchens Ltd presents a proposal to the board of directors for the purchase of the complete inventory of Integral Inspirations Ltd, which is being wound up. Neville, one of the directors, is also a director of Integral Inspirations Ltd. In view of the possible conflict of interest, he discloses his interest to the board.
Assuming there is nothing in the company’s articles of association:
Requirements
Does Neville need to obtain the approval of the board?
A Yes
B No
Does Neville need to obtain the approval of members in general meeting?
C Yes
D No
Correct answer(s): B No
Disclosure is sufficient unless the constitution provides otherwise.
Correct answer(s): D No
Disclosure to the board is sufficient unless the constitution provides otherwise.
104
15 Kim, Tamsin and Anya are directors of Teen Tunes Ltd. Kim and Tamsin have recently sold some of the company’s assets to Top Trumps Ltd, a company in which they are the only directors and shareholders. They sold the assets, secretly, at less than their market value. Anya was not a party to the arrangements and is not in breach of any of the duties she owes as director.
Requirement
Which of the following best describes the legal position?
A Kim and Tamsin are jointly and severally liable to make good the loss suffered by Teen Tunes Ltd.
B Kim, Tamsin and Anya are jointly liable to make good the loss suffered by Teen Tunes Ltd.
C Kim, Tamsin and Anya are jointly and severally liable to make good the loss suffered by Teen Tunes Ltd.
D Anya may avoid the contract between Teen Tunes Ltd and Top Trumps Ltd.
LO 2l
Correct answer(s): A Kim and Tamsin are jointly and severally liable to make good the loss suffered by Teen Tunes Ltd.
Anya is not liable because she is not guilty of any breach of duty. She might be negligent in failing to spot the transaction. Directors in breach are jointly and severally liable.
105
17 Drake was formerly a director of two listed companies. He is now a director of Dark Side Ltd and actively manages his business in a way that prejudices the company’s main creditor, Sunshine Bank plc, but favours a small number of smaller lenders with whom he has connections. The financial status of Dark Side Ltd is rapidly approaching a situation where it may be unable to pay its debts but it is not yet insolvent.
Requirements
Can Drake be liable to contribute to the assets of the company by reason of his fraudulent trading?
A Yes
B No
Will the fact that he is a highly experienced businessman be relevant to the standard of care applied, if he were ever to be sued for wrongful trading?
C Yes
D No
LO 2l
Correct answer(s): B No
Civil liability only arises when a company is being wound up. Criminal liability exists regardless of whether the company is solvent or not.
Correct answer(s): C Yes
The standard of care is that of a reasonably diligent person, but a director is also judged by reference to their own skill, knowledge and experience. Wrongful trading is only relevant in liquidation.
106
18 Miles and Elizabeth are both directors of a private company selling organic food. Miles has been found guilty of a number of breaches of competition law. Elizabeth was also a director and company secretary of Big Beans Ltd, a company that has just gone into insolvent liquidation. The court is considering an application for their disqualification.
Requirements
Will Miles face certain disqualification?
A Yes
B No
Will disqualification be automatic for Elizabeth?
C Yes
D No
Correct answer(s): B No
A disqualification order (of up to 15 years) may be made in the discretion of the court.
Correct answer(s): D No
The court would also need to be satisfied that Elizabeth is unfit to be concerned in the management of a company (the court may take into account her conduct as a director of Big Beans Ltd) in order for a disqualification to be mandatory.
107
19 Are the following statements true or false?
LO 2k, 2l
Any individual member can apply to the court for cancellation of a variation of class rights, provided they are a member of the class affected.
A True
B False
Holders of at least 10% of the company’s paid-up capital with voting rights can requisition a general meeting.
C True
D False
LO 2h
Correct answer(s): B False
Only a member, or members, holding at least 15% of the class of shares in question may apply.
Correct answer(s): C True
In fact, holders of at least 5% of the company’s paid-up capital with voting rights can requisition a meeting.
108
23 Are the following statements true or false?
LO 2g
A company member may make an application for relief on the grounds of unfairly prejudicial conduct, even in respect of an act or omission that has not yet occurred, where they consider that the proposed act or omission will be unfairly prejudicial to the interests of the company’s members.
A True
B False
Relief under s.994 will not be granted unless there has been a breach of company law.
C True
D False
LO 2i
Correct answer(s): A True
Correct answer(s): D False
Although relief is considerably less likely to be given in the absence of any such breach.
109
25 Wasim is a member of Great Golf Ltd and is in dispute with the company. The majority agreed to buy out his interest in the company but no agreement as to the purchase price for his shares was ever reached. Exasperated by the actions of the majority, Wasim intends to petition the court on the grounds that it is just and equitable to wind up the company.
Requirements
Is petitioning the court for winding up on the just and equitable ground available to any member regardless of the size of their shareholding?
A Yes
B No
Is the court likely to order the winding up of Great Golf Ltd on the just and equitable ground?
C Yes
D No
LO 2i
Correct answer(s): A Yes
Correct answer(s): D No
This is a remedy of last resort. In this case there is clearly an alternative to liquidation (buying out Wasim’s shares).
110
26 In a private company, shareholders representing what minimum percentage of the nominal value of shares with voting rights must agree to shorter notice than 14 days for a general meeting, in the absence of any provision in the articles of association?
A 51%
B 75%
C 90%
D 95%
LO 2h
Correct answer(s): C 90%
The articles may require a higher percentage up to 95%.
111
27 How much notice is required to be given by a public limited company for the holding of its annual general meeting?
A 7 days
B 14 days
C 21 days
D 28 days
Correct answer(s): C 21 days
Unless all members entitled to attend and vote agree to a shorter period.
112
28 Are the following statements true or false?
A private company is not required to hold an annual general meeting.
A True
B False
A public limited company can use the written resolution procedure provided its articles of association expressly authorise it.
C True
D False
LO 2h
LO 2i
LO 2k, 2h
Correct answer(s): A True
Correct answer(s): D False
A public limited company must pass resolutions in general meeting.
113
29 Which of the following actions requires the passing of an ordinary resolution with special notice?
A The change of company’s name
B An alteration of a company’s articles of association
C A reduction of a company’s share capital
D The removal of an auditor
Correct answer(s): D The removal of an auditor
Only an ordinary resolution is required, but with special notice of 28 days.
114
30 A director can be removed from office:
Requirements
By passing a written resolution
A Yes
B No
Under a provision of a company’s articles of association
C Yes
D No
Correct answer(s): B No
A written resolution cannot be used in order to remove a director or auditor from office.
Correct answer(s): C Yes
For example, model articles provide for the removal of bankrupt directors.
115
32 Valli is the managing director of ABC Carpets Ltd. Last month she signed a proposal for insurance against flood damage without reading it. The proposal had been filled in by her insurance broker and contained inaccurate answers to some questions. The insurers have now declined liability following a flood, which has destroyed most of the company’s stock of carpets.
Requirement
Is Valli in breach of her duty as a director?
A No, she has acted in good faith and exercised her powers as a company director constitutionally.
B No, the insurance company are liable, it was their insurance broker who filled in the insurance form incorrectly.
C Yes, in her capacity as managing director of ABC Carpets Ltd she should have checked that the insurance form was completed correctly before she signed it.
D No, as long as she can show that she has exhibited the degree of skill which may reasonably be expected from a person of her knowledge and experience.
LO 2l
LO 2k
Correct answer(s): C Yes, in her capacity as managing director of ABC Carpets Ltd she should have checked that the insurance form was completed correctly before she signed it.
These facts are most likely to amount to a breach of the duty of care owed by a director, particularly since she is a managing director.
116
33 Are the following statements true or false in relation to the exercise of director’s powers?
A director of a company is required to exercise their powers subject to any directions given by ordinary resolution.
A True
B False
A director of a company can restrict the exercise of their power by agreeing in advance to support any resolution proposed by the majority shareholder.
C True
D False
Correct answer(s): B False
A director is not an agent of the shareholders and is not liable to act as instructed by them.
Correct answer(s): D False
A director owes a duty to exercise independent judgement. Such an agreement would constitute a breach of this duty. They may, however, act in accordance with an agreement duly entered into by the company restricting the future exercise of discretion by its directors or in any way authorised by the company’s constitution.
117
34 Which of the following can be passed by ordinary resolution?
A A change of company name
B The alteration of the articles
C The removal of a company director
D A variation of class rights
LO 2m
LO 2h
Correct answer(s): C The removal of a company director
A company director may be removed by the passing of an ordinary resolution with special notice. The other options require the passing of a special resolution.
118
36 Which of the following is a formally appointed director that is not involved in the day-to-day running of the business?
A A shadow director
B An alternative director
C A non-executive director
D A de facto director
Correct answer(s): C A non-executive director
Non-executive directors are formally appointed but are not involved in the day-to-day running of the business. This is the role of executive directors.
119
37 Are the following statements true or false?
LO 2k
Directors can be found guilty of fraudulent trading even if their company has not been wound up.
A True
B False
Directors can only be found to have committed wrongful trading if their company has been wound up.
C True
D False
Correct answer(s): A True
Criminal liability may arise (but civil liability only arises on a winding up).
Correct answer(s): C True
Wrongful trading only applies when a company is wound up.
120
38 Directors have a duty to maintain sustainable business practices. Identify whether the following statements are true or false.
Directors are legally required to consider the impact on the environment when making business decisions.
A True
B False
It may be appropriate in certain circumstances for directors to include nature as a stakeholder alongside suppliers, customers, shareholders and employees.
C True
D False
Correct answer(s): A True
Directors have a duty under s.172 of the Companies Act to consider the environment and the impacts of business activities on it when making decisions.
Correct answer(s): C True
Directors may treat nature as a stakeholder to their business in some instances.
