Directors' duties and responsibilities

Question 1

Describe a de jure and de facto director.

Answer 1

De jure-validly appointed at law.

De facto-assumes to act as director but not validly appointed.

Question 2

What is a shadow director?

Answer 2

Someone who has a significant amount of influence over a company’s affairs, even though they are not formally appointed as a director.

Someone who the directors of a company act in accordance with.

Question 3

Describe an executive and non-executive director.

Answer 3

Executive-appointed to executive office e.g. HR Director.

Non-executive-officer of the company but not an employee.

Question 4

What is an alternate director?

Answer 4

Someone who takes the place of a director where one or more directors are absent.

Question 5

How may companies with MA appoint a director?

Answer 5

-By an OR of the shareholders

-By a majority decision of the directors

Question 6

What is a directors service contract and where must they be held?

Answer 6

A written contract of employment setting out the terms and conditions of employment.

Companies have an obligation to keep its directors’ service contract at its registered office for inspection by the members.

Question 7

How long must a directors service contract be kept from the date of termination or expiry of the contract?

Answer 7

At least 1 year from the date of termination or expiry of the contract for the members to inspect.

Question 8

What are Forms AP01 and AP03 used for?

Answer 8

Form AP01-appointment of director

Form AP03-appointment of secretary

Question 9

What are Forms TM01 and TM03 used for?

Answer 9

TM01-director leaving

TM03-secretary leaving

Question 10

What information is required in respect of directors remuneration in the company’s annual accounts?

Answer 10

-directors’ salaries, bonuses and pension entitlements; and

-compensation paid to directors and past directors for loss of office

Question 11

Outline the ways in which a director can be removed.

Answer 11

-removal by OR of the shareholders (28 days special notice required)

-resignation by notice

-automatic termination

-disqualification under CDDA 1986

-retirement by rotation

Question 12

Are directors who are also shareholders allowed to vote in their capacity as a shareholder on the OR to remove them?

Answer 12

Yes, this is allowed.

Question 13

Describe the S171 director duty to act within powers.

Answer 13

-Duty act within the company’s constitution

-Duty to exercise powers for the purposes for which they are conferred

Question 14

Describe the S172 director duty to promote the success of the company for the benefit of the members as a whole.

Answer 14

A director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole.

Success should normally mean a ‘long-term increase in value’.

Question 15

Describe the S173 director duty to exercise independent judgment.

Answer 15

This duty codifies the principle that directors must exercise their powers independently, and not fetter their discretion. They can rely on advice from others but must make their own individual judgments.

Question 16

Describe the S174 director duty to exercise reasonable care, skill and diligence.

Answer 16

The level of care, skill and diligence which a director must exercise is assessed objectively and subjectively.

The minimum standard expected of a director is that objectively expected of a director in that position. This standard may be subjectively raised if the particular director has any special knowledge, skill and experience.

Question 17

Describe the S175 director duty to avoid conflicts of interest.

Answer 17

This duty requires a director to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

Question 18

Describe the S176 director duty to not accept benefits from third parties.

Answer 18

Under this duty, a director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing/not doing anything as a director.

Question 19

Describe the S177 director duty to declare any interest in a proposed transaction.

Answer 19

Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors before the transaction is entered into.

Question 20

When does a director not need to make a declaration pursuant to S177 CA 2006?

Answer 20

-When the director is not aware of the interest, transaction or arrangement in question.

-The interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about it.

-If the conflict arises because it concerns their service contract and their service contract has been considered by the board.

Question 21

Describe the S182 duty to disclose interests in existing transactions.

Answer 21

Directors are also required to disclose interests in existing transactions or arrangements entered into by the company.

Question 22

Can a director who is interested in a transaction/arrangement with the company vote or count in the quorum for BRs in respect of that transaction/arrangement?

Answer 22

No, unless:

-the company disapplies this rule each time the conflict arises by OR

-the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest

-the director’s conflict arises from a permitted cause

Question 23

What is the remedy for a breach of the S174 duty to take reasonable care, skill and diligence?

Answer 23

Damages.

Question 24

What are the remedies for breach of duties other than the S174 duty?

Answer 24

Remedies for breach of duties other than s174 include injunction, setting aside, restitution, restoration and damages.

Question 25

What kind of approval/resolution is required for a director's service contract for a guaranteed period in excess of two years?

Answer 25

Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years.

Question 26

What are the consequences of a company agreeing to a provision in a service contract in contravention of S1882 CA 2006?

Answer 26

The provision will be void to the extent of the contravention under s189 CA 2006, and the contract will be deemed to contain a term entitling the company to terminate it any time by the giving of reasonable notice.

Question 27

How long must the memorandum setting out the proposed director's service contract be made available before the GM?

Answer 27

Must be made available for inspection by members at the company’s registered office for not less than 15 days ending with the meeting date and at the meeting itself-s188(5) CA 2006.

Question 28

What is a substantial property transaction under S190 CA 2006?

Answer 28

Section 190 CA 2006 governs an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.

Question 29

What kind of approval is required for substantial property transactions?

Answer 29

Shareholder approval by ordinary resolution. Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.

Question 30

What is the definition of a substantial asset under S190 CA 2006?

Answer 30

An asset worth more than £100,000. An asset worth between £5,000-£100,000 will only be a substantial asset if it is worth more than 10% of the company's net asset value.

Question 31

If a company is only recently incorporated, what is held to be their net asset value?

Answer 31

The amount of the company’s called up share capital.

Question 32

What are the key categories of connected persons?

Answer 32

1. Members of the director's family: spouse/civil partner, parents, children. Anyone else does not count 2. Companies in which the director and others connected with them hold 20% or more of the shares 3. A business partner of the director or those connected with them 4. Trustees of a trust the beneficiaries of which include the director or those connected with them

Question 33

If a transaction is between a company and a director of the company's holding company/connected person, what approval is required?

Answer 33

The holding company will also need to approve the transaction by ordinary resolution.

Question 34

Where a substantial property transaction is entered into without shareholder approval, what remedy is available?

Answer 34

The transaction is voidable at the instance of the company unless: (a) restitution is no longer possible (b) the company has been indemnified for the loss/damage suffered (c) rights acquired in good faith by third party would be affected by the avoidance

Question 35

What defence is available to a breach of substantial property transactions under S190 CA 2006?

Answer 35

-Took all reasonable steps to ensure company's compliance with s190 CA 2006 -Had no knowledge of the circumstances constituting the contravention

Question 36

What approval is required for loans, guarantees or security for directors?

Answer 36

Shareholder approval via ordinary resolution. These types of transactions require approval for all types of companies and is the only restriction for a private company with no association to a public company.

Question 37

What kind of transactions require shareholder approval for public companies and private companies associated with public companies?

Answer 37

These companies also require shareholder approval for: -Loans to a person connected to a director of the company or a director of its holding company (s200); -Quasi-loans (s198) to, or credit transactions (s201) with their directors and the directors of a holding company or persons connected with such directors; and -Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors (s197, 198. 200, 201).

Question 38

What are the exceptions to the requirement for shareholder approval for loans, quasi-loans and credit transactions?

Answer 38

Section 204: Expenditure on company business (up to a maximum of £50,000); Section 205: Loans for defending proceedings brought against a director; Section 206: Loans for defending regulatory actions or investigations; Section 207: Minor and business transactions-loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval; Section 208: Intra group transactions, and Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).

Question 39

Where a loan/related transaction with a director is entered into without shareholder approval, what remedy is available?

Answer 39

The arrangement is voidable at the instance of the company unless: (a) restitution is no longer possible (b) the company has been indemnified for the loss/damage suffered (c) rights acquired in good faith by third party would be affected by the avoidance

Question 40

What defence is available to a breach of loans/related transactions with directors under S200 CA 2006?

Answer 40

-Took all reasonable steps to ensure company's compliance with s200 CA 2006 -Had no knowledge of the circumstances constituting the contravention

Question 41

How long must the memorandum setting out the proposed loan/related transaction with a director be made available before the GM?

Answer 41

Must be made available for inspection by members at the company’s registered office for not less than 15 days ending with the meeting date and at the meeting itself-s188(5) CA 2006.