Directors' duties and responsibilities

Question 1

Who are the directors accountable to?

Answer 1

Directors are accountable to the company itself rather than to the shareholders directly.

Question 2

Directors versus shareholders

Answer 2

Directors:
- manage the company on a day to day basis (on an agency basis)
- Certain actions can only be taken by directors if the shareholders have given authority
- owe duties to the company

Shareholders:
- own the company
- are able to control key decisions through shareholder resolutions eg to give directors authority to change the name of the company

Question 3

Directors’ authority to manage the company

Answer 3

• some decisions are reserved for shareholder approval
• board is usually free under a company’s articles to make decisions on behalf of the company on all other matters (e.g. employ people, determine their salary, enter into contracts, borrow from banks etc)
• Board is also able to delegate some decisions to one of the directors or a committee

Question 4

Directors’ accountability

Answer 4

Directors’ actions and powers are restricted and regulated by statute.

Helps to ensure companies are run for benefit of shareholders and to protect creditors.

May also be made to account for wrongs through civil and criminal actions.

Crime:
- fraud act
- theft act
Civil:
- Criminal Justice Act 1993 (insider dealing)
- PCA 2002 (money laundering)

Question 5

Categories of directors

Answer 5

1. At law:
   - de jure
   - de facto
   - shadow
2. In practice:
   - executive
   - non-executive

Question 6

What is a de jure director

Answer 6

One who has been validly appointed under law:

• private company: at least one
• public company: at least two

Note: every company must have at least one director who is a natural person

Must be at least 16 years old.
Cannot be a director if prohibited under director disqualification legislation.

Question 7

What is a de facto director?

Answer 7

Someone who assumes to act as a director but has in fact not been validly appointed.

Fiduciary duties and liabilities apply to de factor directors as they do de jure directors

Question 8

What is a shadow director?

Answer 8

A person who exerts influence on the board without being appointed as a director.

Designed to ensure that anyone who acts as a director even if not technically appointed as one is subject to the same duties and restrictions which apply to all directors.

Question 9

Executive director

Answer 9

A director who as been appointed to an executive office. Such a director will generally spend the majority if not all the working time on the business of the company and will be both an officer and employee.

e.g. marketing director, finance director, managing director

Question 10

Non-executive director

Answer 10

Officer of the company but not an employee of the company.

Does not take part in the day-to-day running of the company. Role is generally to provide independent advice and guidance to the board and to protect the interests of the shareholders.

Question 11

What is an alternate director

Answer 11

Some companies provide for an alternate director in their articles to take the place of a director where one or more directors are absent

Less common now.

Question 12

Company secretary

Answer 12

Main duties:
- keep the company books up to date
- produce minutes of board and general meetings
- make sure all necessary filings are made at Companies House

Public companies are required to have a one (with requisite knowledge and experience).

Private companies are not required to have a company secretary.

Question 13

How are directors appointed?

Answer 13

Either:

• ordinary resolution
• decision of the directors

Usually will be done by the directors

BUT: make sure to check the articles in case they are different from MA

Question 14

Service contracts

Answer 14

Directors should enter into service contracts (note, no automatic entitlement for directors to be paid for their services)

Company has an obligation to keep directors’ service contracts at registered office for inspection by members

Generally, service agreement only required board approval.
However, if a long-term contract, shareholder approval will be required.

Question 15

Disclosure of identity of directors and secretary

Answer 15

• Every company must maintain a register of its directors
• Each company must also notify the Registrar of Companies of changes relating to its directors (AP01 for appointment of director, AP03 for secretary)

This information is available for inspection at Companies House by the public.

Register at company’s register office must be open for inspection for any member without charge and any other person on payment of a fee.

Question 16

Privacy for officers of the company

Answer 16

Company’s register of directors must contain following for an individual:

• name and any former name
• a service address
• country or state in which usually resident
• nationality
• business occupation
• date of birth

Service address need not be residential address.

Individual directors still provide residential address but this is not open to public inspection.

Question 17

Annual accounts: disclosure requirements

Answer 17

Includes info relating to:

S412 CA 2006:
- directors’ salaries, bonus payments, pension entitlements
- compensation paid to directors and past directors for loss of office

Also: details must be disclosed of any payments made to or receivable by a person connect to a director or a body corporate controlled by a director

S413 CA 2006:
- info on advances and credits given by a company to its directors and guarantees entered into by a company on behalf of its directors.

Question 18

Ways in which an individual may cease to be a director

Answer 18

1. Resignation by notice
   - tender letter of resignation
   - usually board will pass a resolution accepting letter (but not necessary)
2. Automatic termination: as soon as:
   - director becomes disqualified from being a director
   - subject of an individual voluntary arrangement
   - director becomes bankrupt
   - doctor states in writing that director has become physically or mentally incapable of acting as a director and will remain so for more than three months
3. Disqualification
   - court order
   - max 15 years
   - criminal offence to participate
4. retirement by rotation
   - Public companies: require retirement and reappointment of directors by the members every three years
   - Listed companies: subject to annual re-election

Companies House updated by filing form TM01.

Question 19

Directors’ duties

Answer 19

Any breach of duty by a director is a wrong done to the company and is therefore the claimant in proceedings in respect of a breach of duty by a director.

Statutory duties are owed by all directors (171-177 CA2006)

• Duty to act within powers
• Duty to promote the success of the company for the benefit of the members as a whole
• Duty to exercise independent judgment
• Duty to exercise reasonable care skill and diligence
• Duty to avoid conflicts of interest
• Duty not to accept benefits form third parties
• Duty to declare an interest in a proposed transaction

Question 20

S171: Duty to act within powers

Answer 20

Two duties:

1. Duty to act within the company’s constitution
   - includes everything in the articles
   - in breach if act without authority
2. Duty to exercise powers for the purposes for which they are conferred
   - must not use powers for improper purposes

Question 21

S172: Duty to promote the success of the company

Answer 21

• for the benefit of the members as a whole
• success: long-term increase in value

Have regard to (not exhaustive):
- likely long-term consequences of any decision
- employees’ interests
- need to foster relationships with suppliers, customers
- impact of the company’s operations on the community and the environment
- desirability of the company’s maintaining a reputation for high standards of business conduct
- the need to act fairly as between the members of a company

Part of the concept of ‘enlightened shareholder value’: middle ground between max profits and acting in the interests of a wider group of stakeholders

Question 22

Compliance with s 172

Answer 22

Most companies take a common-sense approach of ensuring that board minutes clearly note that consideration has been given to the s172 CA 2006 duty when taking board decisions.

Question 23

s173; Duty to exercise independent judgment

Answer 23

Based on the principle that directors must exercise their powers independently and not fetter their discretion.

Can rely on advice from other but must make their own judgments.

Cannot blindly follow other’s views without considering the interests of the company.

Question 24

S174: Duty to exercise reasonable care, skill and diligence

Answer 24

Level of skill, care and diligence which would be exercised by a reasonably diligent person with:

• the general knowledge, skill and experience that may reasonably be expected of someone in their role; and
• the general knowledge, skill and experience of that director

Whichever standard is higher is the one used to assess.

Question 25

S175: Duty to avoid conflicts of interest

Answer 25

Requires 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 interests of the company. Applies in particular to the exploitation of any property, information or opportunity Not infringed if situation cannot reasonably be regarded as likely to give rise to a conflict or if conflict arises: - in relation to a transaction with a company (subject to duty of disclosure under 177 but not prohibited) - in relation to a matter which has been authorised by the directors e.g. being on the board of two competing companies (need approval from board of both boards)

Question 26

S176: Duty not to accept benefits from third parties

Answer 26

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 (or not doing) anything as a director. Not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Note: no way for other directors to authorise an arrangement under this section but shareholders may be able to ratify or authorise in advance.

Question 27

S177: Duty to declare an interest in a proposed transaction

Answer 27

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

Question 28

s177: procedural matters

Answer 28

- applies equally to indirect interests (e.g. through a spouse or company in which they are a member) and the director does not have to be party to the transaction for 177 to apply - Must declare interest BEFORE transaction is entered into - declaration can be at board meeting or in advance of BM in writing (must be sent to all directors in paper or electronically (if agreed) - can give a one-off general notice of their interest: this can give notice to the effe t they are always to be considered interested in any transaction with a specified party

Question 29

When does a director not need to make a declaration pursuant to s177?

Answer 29

- director is not aware of the interest or transaction/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 the conflict of interest - if the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board or committee of the board In practice: directors are likely to continue to declare their interests even if other directors are aware of it as it can easily be documented in board minutes and is safer than relying on an exception later down the line.

Question 30

s177 and MA14

Answer 30

MA14: a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement MA14(2) and (3) allow the conflicted director to vote if: - the company disapplies MA14(1) each time by ordinary resolution - director's interest cannot reasonably be regarded as likely to give rise to a conflict of interest - director's conflict arises from a permitted cause Can also remove MA14 and replace it with an article permitting director interests to vote and count in quorum

Question 31

Remedies for breaches of director's duties

Answer 31

s171-173 and 175-177: - injunction - setting aside the transaction - restitution and account of profits - restoration of company property - damages s174 (care, skill, diligence): - only remedy is damages

Question 32

Shareholder approval in advance

Answer 32

Shareholders may support a director's proposed action and be prepared to approve it in advance even though it would otherwise represent a breach of the general duties. (but cannot approve unlawful acts) Authorisation is only effective if there has been full disclosure by the directors so that the shareholders are properly aware of the details of the action and can make an informed decision.

Question 33

Ratification for breach of duty

Answer 33

Shareholders can ratify by ordinary resolution the following conduct of directors: - negligence - default - breach of duty - breach of trust Note: if a director is also a shareholder they cannot ratify their own breach Note: unlawful acts can never be ratified

Question 34

Transactions with directors

Answer 34

Three types which require the approval of the company's shareholders. - Directors' long-term service contract - Substantial property transactions - Loans, quasi-loans and credit transactions

Question 35

Who is the best boyfriend?

Answer 35

Cameron Alexander Drummond

Question 36

Long-term service contracts

Answer 36

Need shareholder approval by ordinary resolution if the contract is for a guaranteed period in excess of two years

Question 37

Service contracts: guaranteed term

Answer 37

Applies to: - period during which the contract is to continue other than at the instance of the company; and - during this time the company either cannot terminate the contract or can only terminate in specific circumstances OR - the period of notice to be given by the company e.g. unable to terminate for first 18 months and then has to give nine months notice to terminate - this is an excess of two years and will need to be approved by an ordinary resolution

Question 38

Consequences of non-compliance

Answer 38

- provision will be void to extent of non-compliance - contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonably notice

Question 39

Wholly owned subsidiary exception

Answer 39

Approval is not required by members of a company which is a wholly owned subsidiary of another company.

Question 40

s177 disclosure - service contract

Answer 40

A director is not required to disclose their interest in the service contract. However, it is likely to remain the practice that directors will continue to disclose so it is documented in the board minutes. Director will not be permitted to vote or count in the quorum on any board resolution relating to the contract.

Question 41

Members' inspection rights of service contracts

Answer 41

- must keep copy for inspection at registered office for at least one year from date of termination or expiry

Question 42

Service contract: procedure

Answer 42

1. Where OR to be passed at a GM, memorandum setting out the proposed contract must be made available for inspection by members of the company, bothL - at company's registered office for not less than 15 days ending with date of meeting - at the meeting itself Therefore must be minimum of 15 days notice of the GM held to approve the contract 2. Where written procedure is being followed: - memorandum setting out the proposed contract must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted

Question 43

Substantial property transactions

Answer 43

Governs acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company. Permitted but again require shareholder approval but ordinary resolution

Question 44

Substantial property

Answer 44

Non-cash asset: any property other than cash Substantial: - asset worth £5000 or less is not substantial - worth more than £100,000 is a substantial asset - asset worth more than £5000 but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company's net asset value

Question 45

Connection persons

Answer 45

1. Members of the directors' family: spouse or civil partner, parents, children or step-children (NOT brothers, sisters, grandparents, uncles and aunts) 2. Companies in which the director holds 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 46

Director (or connected person) of holding company

Answer 46

Where the transaction is between a company and a director of the company's holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.

Question 47

Wholly owned subsidiary

Answer 47

Approval is not required by members of any company which is a wholly-owned subsidiary of another company.

Question 48

Remedies where transaction entered into without shareholder approval

Answer 48

Transaction is voidable at the instance unless: - restitution is no longer possible - company has been indemnified for the loss or damage suffered - rights acquired in good faith by third party would be affected by the avoidance Directors involved (and those connected) are liable to account to the company for any profits made and to indemnify the company for any loss incurred. Arrangement can always be affirmed by shareholders of company and holding company (where relevant) by OR within a reasonable period. If affirmed - can no longer be avoided.

Question 49

Defences for substantial property transactions

Answer 49

- if between company and connected person and the director shows they took all reasonable steps to ensure the company's compliance with s190 the director will not be liable. Also a defence for a director or connected person who authorised the transaction to show they had no knowledge of the circumstances constituting the contravention.

Question 50

S190 and 177

Answer 50

Under s177 the director would need to disclose the nature and extent of their interest to the board. Any interested director will not be permitted to vote or count in the quorum.

Question 51

Different loans to directors

Answer 51

Loans: where the company lends money to a director Quasi-loans: pays off debt on behalf of director to a third party and the director later reimburses the company Credit Transactions: includes any transactions entered into between the company and the director where the company provides goods and services on a credit basis which will be paid at a later date Guarantees or the provision of security for any of the above

Question 52

Which companies have restrictions on loans?

Answer 52

Private companies not associated with PLCs have fewer restrictions PLCs or Private Companies associated with PLC have more restrictions

Question 53

All companies: loans, guarantees or security for directors

Answer 53

Need approval of shareholders by ordinary resolution to make: - loans to its directors or to directors of its holding company - give guarantees or enter into security in connections with loans

Question 54

Extra restrictions for public companies and private companies associated with public companies

Answer 54

In addition to above, also require shareholder approval for: - loans to a person connected to a director of the company or a director of its holding company - quasi-loans to, or credit-transactions with: directors, directors of holding co or persons connected to such directors - guarantees or security in respect of loans, quasi-loans or credit transactions with directors, directors of holding co or persons connected to such directors

Question 55

Exceptions to shareholder approval for loans and related transactions

Answer 55

- expenditure on company business (up to £50,000) - loans for defending proceedings brought against a director - loans for defending regulatory actions or investigations - minor and business transactions (loans or quasi-loans up to £10,000 or credit transactions up to £15,000) - Intra group transactions - money lending companies and loan is made in ordinary course of business

Question 56

Defences

Answer 56

- director will not be liable where they took all reasonable steps to ensure company complied - defence for connected person and any director that authorised the transactions that they had no knowledge of the circumstances constituting the contravention

Question 57

Holding co

Answer 57

If transaction is between company and the director of the company's holding company or a person connected to a director of the holding co the holding co will also need to approve the transaction.

Question 58

Wholly owned subsidiary

Answer 58

Approval is not required by members where the company is wholly-owned subsidiary of another company

Question 59

177 disclosures

Answer 59

Director would need to disclosure the nature and extent to the board (also disclose indirect interests!)

Question 60

Procedure

Answer 60

GM: - reg office for inspection not less than 15 days before - at metting Written resolution: - memorandum should be attached