Directors Duties

Question 1

What is the primary responsibility of directors in a company?

Answer 1

Directors have day-to-day control over the company’s business and its assets.

Question 2

Who owns the company?

Answer 2

The shareholders own the company.

Question 3

What is the difference between the roles of shareholders and directors?

Answer 3

Shareholders focus on their rights, while directors focus on their duties.

Question 4

What is one major temptation directors might face?

Answer 4

Using their power for personal benefit instead of for the company.

Question 5

What does the Companies Act 2006 impose on directors?

Answer 5

Duties including equitable ‘fiduciary’ duties and common law duties of care, skill, and diligence.

Question 6

What are fiduciary duties primarily aimed at?

Answer 6

Stopping directors from abusing their positions.

Question 7

What do common law duties focus on?

Answer 7

Preventing incompetence and carelessness.

Question 8

What transactions require shareholder consent according to the Companies Act 2006?

Answer 8

Borrowing money, selling substantial assets, and agreeing to long fixed-term service contracts.

Question 9

What procedural requirement must directors with an interest in a transaction follow?

Answer 9

Directors must disclose any interests in decisions taken by the board.

Question 10

What can happen to directors of insolvent companies?

Answer 10

They can be made to contribute to the company’s assets.

Question 11

What is the consequence of breaching certain provisions of company law?

Answer 11

It can be a criminal offence.

Question 12

To whom are directors’ duties owed?

Answer 12

To the company, not to individual shareholders.

Question 13

What can a liquidator do in the case of company insolvency?

Answer 13

Bring a claim on behalf of the company for breach of duty.

Question 14

What is one of the most significant changes brought by the Companies Act 2006?

Answer 14

The codification of directors’ duties.

Question 15

How many general duties are outlined in the Companies Act 2006?

Answer 15

Seven general duties.

Question 16

What is the duty to act within powers according to section 171?

Answer 16

Directors must act within the powers given to them by the company’s articles.

Question 17

What is the duty to promote the success of the company according to section 172?

Answer 17

Directors must act in good faith to promote the success of the company for the benefit of its members.

Question 18

What must directors consider under section 172?

Answer 18

• Likely consequences of decisions in the long term
• Interests of the company’s employees
• Business relationships with suppliers and customers
• Impact on the community and environment
• Reputation for high standards
• Fairness among members

Question 19

What is the duty to exercise reasonable care, skill, and diligence according to section 174?

Answer 19

Directors must exercise care, skill, and diligence that a reasonably diligent person would.

Question 20

What are the remedies for breach of the general duties?

Answer 20

Equitable remedies for most duties, common law damages for breach of section 174.

Question 21

What are fiduciary duties derived from?

Answer 21

Duties owed by trustees.

Question 22

What is the principle underlying section 172?

Answer 22

Directors should act in the best interests of the company.

Question 23

What does section 175 require directors to do?

Answer 23

Avoid conflicts of interest.

Question 24

True or False: Section 175 applies to transactions with the company.

Answer 24

False.

Question 25

Fill in the blank: The duty to declare interest in proposed transactions is outlined in section _______.

Answer 25

177

Question 26

What is the purpose of section 175 of the Companies Act 2006?

Answer 26

Section 175 addresses conflicts of interest that directors may have when entering into transactions not with their company

Question 27

What is required for private companies incorporated before October 1, 2008, regarding conflicts of interest?

Answer 27

Shareholders must pass an ordinary resolution granting directors the power to authorize conflicts

Question 28

What section requires directors to disclose their interests in transactions?

Answer 28

Section 177

Question 29

Fill in the blank: Directors must declare their interest by the time the company enters into the _______.

Answer 29

[transaction]

Question 30

What happens if a director fails to declare their interest in time?

Answer 30

They commit a criminal offence

Question 31

What is the common law duty imposed on directors regarding care, skill, and diligence?

Answer 31

Section 174 states a director must exercise reasonable care, skill, and diligence

Question 32

What two-part test is used to determine a director's standard of care?

Answer 32

1. General knowledge, skill, and experience expected of a person in that role. 2. The specific knowledge, skill, and experience of the director

Question 33

How does the standard of care differ for executive and non-executive directors?

Answer 33

Executive directors are held to a higher standard and must devote more time to their roles

Question 34

What legal remedy is usually available for breach of common law duties by directors?

Answer 34

Common law damages

Question 35

What is the rule in Foss v Harbottle?

Answer 35

It states that the company is the proper claimant if a wrong is done to it

Question 36

What is a derivative claim?

Answer 36

A procedure allowing minority shareholders to bring an action against wrongdoers in the company's name

Question 37

What is the purpose of section 994 of the Companies Act 2006?

Answer 37

It allows any member to petition the court for unfairly prejudicial conduct in the company's affairs

Question 38

What does section 180 sub-section (4) allow regarding conflicts of interest?

Answer 38

It allows a company's articles to contain rules exempting directors from liability under certain conditions

Question 39

What must directors do if they want to authorize a transaction under section 175?

Answer 39

They must disclose their interest to the board

Question 40

True or False: Authorization under section 175 excuses breaches of other general duties.

Answer 40

False

Question 41

Fill in the blank: Directors can delegate their responsibilities but must _______ the people to whom they have delegated.

Answer 41

[supervise]

Question 42

What section of the Companies Act allows for the ratification of a breach of duty by shareholders?

Answer 42

Section 239 ## Footnote Ratification can be done by an ordinary resolution of the members.

Question 43

What are the limited exceptions set out in which section that protect directors from some consequences of breaches?

Answer 43

Section 180 ## Footnote These exceptions do not protect directors from all consequences of a breach.

Question 44

Which section of the Companies Act states that provisions excusing directors from breaches are void?

Answer 44

Section 232 ## Footnote There is an exception for provisions dealing with conflicts of interest.

Question 45

What option do companies have to protect directors against liability for breaches?

Answer 45

Purchase insurance ## Footnote This is permitted under section 233.

Question 46

Fill in the blank: A breach can be __________ by shareholders through a resolution.

Answer 46

ratified

Question 47

What is the term used for shareholders passing a resolution to exonerate a director after a breach has occurred?

Answer 47

Ratifying the breach ## Footnote This can be done by an ordinary resolution of the members.

Question 48

Under which section can shareholders give advance authorisation for breaches of duty?

Answer 48

Section 180 sub-section 4 ## Footnote This preserves old common law rules for advance authorisation. NB: this cannot override statutory requirements or the company’s articles

Question 49

What is one condition under which advance authorisation cannot occur?

Answer 49

If it would involve a fraud on the minority ## Footnote The meaning of 'fraud on the minority' has a lot of case law surrounding it.

Question 50

True or False: Directors can be exempted from liability for any breach under the Companies Act.

Answer 50

False ## Footnote Directors cannot be exempted from liability for any breach that occurs.

Question 51

Which section allows a court to excuse directors who acted 'honestly and reasonably' despite breaching their duties?

Answer 51

Section 1157 ## Footnote This is a last resort for directors who have exhausted other options.

Question 52

What is a key consideration for the court when deciding on derivative claims under section 263?

Answer 52

Whether the breach has been ratified ## Footnote This is one of the factors the court must consider.

Question 53

What can happen to directors if a company becomes insolvent?

Answer 53

They may face proceedings against them ## Footnote Directors can also face disqualification from their role.

Question 54

What is the primary focus of a Section 994 claim under the CA 2006

Answer 54

Protecting the individual shareholders from unfairly prejudice conduct by the majority shareholders of those controlling the company

Question 55

What is the primary focus of a Section 994 claim under the CA 2006

Answer 55

Protecting the individual shareholders from unfairly prejudice conduct by the majority shareholders of those controlling the company

Question 56

What is the focus of a derivative claim ?

Answer 56

Addressing harm caused to the company itself, typically by directors breaching their duties or engaging in misconduct

Question 57

Who benefits from a section 994 claim?

Answer 57

The individual shareholder bringing the claim.

Question 58

What is a common remedy for a Section 994 claim?

Answer 58

A common remedy is an order for the majority shareholders to buy out the petitioners share at a fair value or changes to company governance

Question 59

Who benefits from a derivative claim?

Answer 59

The company

Question 60

What is required before a derivative claim can proceed?

Answer 60

The courts permission, ensuring the claim is in the company’s best interest

Question 61

What types of action would warrant a Section 994 claim?

Answer 61

Actions that unfairly prejudice the shareholder: exclusions from management, dilution of shares without proper justification, withholding dividends unfairly, misuse of company funds affecting shareholder returns

Question 62

What types of actions would warrant a derivative claim?

Answer 62

Actions that harm the company: beach if directors fiduciary duties, misappropriation of company assets by a director, failure to exercise care,sp skills and diligence, authorising illegal transactions or self-dealing by directors