Controls on Directors Flashcards
Give an overview of what the elements of a ‘substantial property transaction’
This happens where:
- a director, in their personal capacity, or someone connected with a director
- buys from or sells to the company
- a non-cash asset
- of substantial value
What must the shareholders do if a substantial property transaction exists?
They can decline to approve it or they can consent, which must be done by way of ordinary resolution (more than 50% in favour)
This protects against a director benefitting financially – selling offices to the company at above market value
The board buying premises wouldn’t require shareholder consent; it is the involvement of a director in their personal capacity that triggers the need for ordinary resolution
What happens if a company proceeds with a SPT without the necessary approval?
1) If the company proceeds without obtaining the necessary ordinary resolution, the transaction is voidable
2) The following people may have to account to the company for any gain they made/indemnify for losses resulting from the SPT:
- Any director with whom the company entered into the arrangement
- Person connected with a director who entered the SPT and the director they are connected to
- Any other director who authorised the arrangement or any transaction entered into in pursuance of such an arrangement
Who is a ‘person connected with a director?’
1) Member of director’s family
- Includes spouse, children, parents, long term partner, stepchildren
- Does not apply to grandparents and grandchildren, siblings
2) Company in which director or a person connected with them (or them taken together):
- Own 20% of corporate shares
- They are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company
3) Note that being a director of the second company does not make them a connected person
What is a ‘non-cash asset?’
Defined as property or interest in property, other than cash
- Loans wouldn’t count
When will a transaction be of ‘substantial value?’
An asset can be classed as substantial in one of two ways:
- (1) It will automatically be classed at substantial if its value is over £100,000.
- (2) It will also be substantial if it is worth more than £5,000 and more than 10% of the company’s net asset value.
Look at company’s balance sheet
Only one of these tests must be satisfied
Give some example situations of substantial property transactions
X (director) buys property for £200,000 from the company of which they are a director
Y (director’s daughter) buys property for £200,000 from the company of which X is a director – X can use their influence to get a good deal for X, hence why shareholder approval is needed
X owns 20% shares in C company (so it fits definition of person connected with a director; C intends to buy property for £200,000 from the 1st company, where X is director
X and Y own 10% share each in C company and above facts same
In what situations will no ordinary resolution be required (exceptions)?
No ordinary resolution needed to approve the following:
- an SPT when the company in question is a wholly owned subsidiary of any other company;
- a transaction between a company and a person in his character as a member of the company;
- a transaction between a holding company and its wholly owned subsidiary; or
- a transaction between two wholly owned subsidiaries of the same holding company
How do shareholders control the giving of loans to directors?
Company cannot give a loan to a director unless this has been approved by ordinary resolution
- If they are a director of a holding company of that company, the holding company must also pass an ordinary resolution to allow the loan
If they lend money to a director without ordinary resolution, the transaction is voidable by the company and those who authorised it/the director themselves have to account for the gain and are jointly and severally liable to indemnify the company for any loss or damage caused
- Can also be affirmed by a later ordinary resolution, within a reasonable time
What exceptions are there to the requirement for ordinary resolution when giving a loan to a director?
1) Expenditure on company business. This covers expenditure for the purposes of the company or for the purposes of enabling the director to properly perform their duties
- This exception is only available for a loan or loans up to a maximum of £50,000;
2) Expenditure on defending civil or criminal proceedings in relation to the company or an associated company;
3) Expenditure on defending regulatory proceedings or defending himself or herself in an investigation by a regulatory authority;
4) Minor and business transactions, as long as the transactions and any other relevant transaction or arrangement does not exceed £10,000
How do shareholders restrict the giving of guaranteed service contracts of over 2 years?
Where a director is offered a service contract for a guaranteed term of more than 2 years, this must be approved by ordinary resolution
The guaranteed element is the part that needs authorisation, as a ten year contract with a one-year notice period would need no such approval
How do payments on loss of office act as a control on directors?
When a directorship ends, sums of £200 or more to which the director is legally entitled (via service contract, wrongful dismissal etc) must be approved by ordinary resolution
- Also applies to payments to past directors, persons connected with a director
If a payment is made in breach of this, the money is held by recipient on trust for the company + any director who authorises the payment is jointly and severally liable to indemnify the company for any loss resulting from the payment
How are shadow directors affected by these controls?
Provisions above relating to SPTs, loans to directors, long-term directors’ service contracts and payment for loss office apply to shadow directors too
In what other ways can directors be held liable in connection with their position as director?
1) Failure to maintain company records is an offence punishable by a fine
- If the records in question are accounting records, the director(s) in default can be imprisoned for up to two years
2) There are also specific offences relating to the failure to file certain documents at
Companies House
- For example, failure to file a special resolution or a memorandum setting out its terms at Companies House within 15 days of it being passed is an offence punishable by fine
3) Liability for financial records.
- Directors face potential criminal and civil liability for breaches of the law regarding their responsibility for the company’s accounts and related reports, for example, compensation for loss resulting from any misleading or
untrue statement in the directors’ report.
4) Liability for breach of health and safety legislation, namely the Health and Safety at Work Act 1974
- Directors can be imprisoned for up to two years and fined for breaches of this legislation
- If somebody dies due to management failure, directors can be liable for the common law offence of gross negligence manslaughter.
5) Bribery – the scope of the Bribery Act 2010 is wide and it is easy to see how seemingly innocent behaviour could be caught by it without the director in question realising.
6) Making political donations without shareholder approval
7) Civil and criminal liability under environmental legislation, for example the Environmental Protection Act 1990
How can a person be disqualified from being a director?
1) Court can disqualify someone from being a director between 2 and 15 years (varies depending on seriousness of behaviour and previous behaviour)
2) The grounds for disqualification are:
- Conviction for an indictable offence
- Persistent breaches of companies legislation
- Fraud on a winding up
- Summary conviction for failure to file a required notice or document
- Being an unfit director of an insolvent company – most common
- Following an investigation and a finding of unfitness
- Fraudulent or wrongful trading
- Breach of competition law
What is the effect of a person being disqualified from being a director?
Someone subject to a disqualification order cannot be a director without leave of the court
Contravention of the disqualification order is a criminal offence, punishable by fine or 2 years in prison
