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Flashcards in SGS 7: Directors Duties Deck (43)
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1
Q

Where are directors duties found in the statute?

A
  • S171 - 177
2
Q

What are the 5 steps that need to be considered when looking at directors interest in proposed / existing transactions

A

1) Seeing actual / potential interest
2) If s177(6) or s182(6) factors apply
3) Declare interest
4) Director unable to vote in meeting or count in quorum
5) conclude

3
Q

In STEP 1 of considering whether directors have interest in proposed / existing transactions, what happens if there is an actual or potential interest?

A

• General Rule under s177 (proposed transaction) or s182 (existing transaction) – DECLARE. When?
• s177(4) – before the transaction is entered into
○ s177(3) – update if info later becomes inaccurate or incomplete
• s182(4) – as soon as is reasonably practicable

4
Q

In STEP 2 of considering whether directors have interest in proposed / existing transactions, what happens in seeing if the s177(6) or s182(6) factors apply?

A

No need to declare if… [although usually will declare anyway]

  1. Could not reasonably be regarded as giving rise to conflict of interest
  2. Other directors are already aware; or
  3. It concerns the terms of service contract
5
Q

In STEP 3 of considering whether directors have interest in proposed / existing transactions, what happens when declaring interest?

A
  • s177(2)(a) or s182(2)(a) – Orally at a BM (documented in board minutes)
  • s184 – Written declaration sent to all directors electronically (if agreed) or in paper form
  • s185 – General notice stating the nature and extent of the interest – i.e. he will always have an interest when dealing with a certain party
6
Q

In STEP 4 of considering whether directors have interest in proposed / existing transactions, what happens if director is unable to vote in meeting or count in the quorum?

A

Unless an exception applies…MA 14(3)
• Disapplication of MA 14 by ordinary resolution; or
• Not reasonably regarded as giving rise to a conflict of interest; or
• Arises from a permitted cause (listed in 14(4))
• Article removed from AoA by s21 CA

7
Q

Who are directors duties owed to?

A
  • All owed to the company, not the individual shareholders.
  • Shareholders can bring Derivative Action against the directors – seeking relief on behalf of the company. Likely to be commenced where only minority of shareholders want to take action s260
8
Q

What are the remedies for the breach of directors duties?

A

• If for any duty aside from reasonable care, skill & diligence (s174):
o Injunction
o Setting aside transaction, restitution & account of profits
o Restoration of company property held by the director
o Damages
o Termination of executive D’s service contract or disqualification

9
Q

Explain ratificaton if a lack of duty / absolving director or liability?

A

Board can ratify a lack of authority and shareholders can absolve a director of liability by ratifying by OR any conduct which involved negligence, default, breach of duty or breach of trust s239
NB – A shareholder may be prevented from participating if they are interested

10
Q

Where is the general rule for substantial non-cash assets found?

A
  • S190

- s190(5) – If a series of transactions aggregated together, only one approval needed.

11
Q

What is the general rule for non-cash assets in s190?

A

A company may not enter an arrangement whereby either:
i. Company acquires a substantial non-cash asset from a director/person connected
ii. Company sells/transfers such an asset to a director/person connected
…unless approved by members by OR s190(1)

Approval can be either before the transaction or after, provided the transaction is conditional on such approval being obtained.

12
Q

When can approval for substantial non cash assets be found?

How many approvals are need?

A
  • Before or after the transaction
  • Provided that the transaction
  • S190(5) - if a series of transactions are aggregated together then only one approval is needed
13
Q

How is an asset ‘substantial’?

A
  • S191 (2)
  • Substantial where it exceeds 100,000
  • If 5,000 < but >100,000 then will be substantial if it exceeds 10% company’s asset value
14
Q

What is the substantial asset being determined by?

A
  • s191(3)(a) and (b)
  • Latest statutory accounts and if no accounts have been prepared then the net asset value is equal to the companys called up share capital
15
Q

Where is a non cash asset defined?

A
  • S1163
16
Q

What is a transaction with director or “person connected with director”?

A
  • State if with a director
  • If with company connected
  • Consider s252 - s255
17
Q

What are the exceptions to the transaction with director or “person connected with director”?

A
  • Where not UK registered: s190(4)
  • S192(a) (b) - in a capacity as shareholder or holding & subsidiary e.g. buyback of shares
  • S193(2) - company in administration
  • S190(6)(a) - service contract entitlement
  • S190(4)(b) - wholly owned subsidiary - members approval not required
18
Q

What is the effect of non-compliance?

A
  • Transaction voidable - at the option of the company, s195
  • Unless
  • Restitution is no longer possible
  • Company indemnified by another
  • Bona fide 3P rights acquired
  • Or s196
  • Director will still be held accountable - s195(3) and (4)
19
Q

What happens if s190 does not apply?

A
  • Then section 177 may apply instead.
20
Q

What is the general rule for directors contract?

A
  • General rule is in s188
  • OR required for director service contracts
  • Which are for guaranteed period in excess of 2 years
21
Q

Can s158 be overridden by s188?

A
  • No s168 cannot be overriden by s188
22
Q

What test needs to be applied for directors contracts?

A
  • Guaranteed term test in s188 (3)(a)(i)
  • Continue / may be continued otherwise than at the instance of the company
  • Cannot be terminated by the company by notice, or CAN BE but only in specified circumstances
23
Q

What are the exceptions to the directors contract rule in s188?

A
  • S188(6)(b)

- Rule does not apply to wholly owned subsidiaries

24
Q

What is the effect of non compliance to the directors contract rules in s188?

A
  • S189
  • Void to the extent of the contravention - i.e. to the term involved
  • Is deemed to contain a term that entitles the company to terminate at any time, on giving reasonable notice.
25
Q

What is the disclosure requirement re a proposed service contract?

A
  • S188(5)(b) - written memorandum to all members that sets out proposed contract. This is required before the OR gets passed
  • S228(2)(a) - must retain a copy of contract at registered office
  • S228(4) - such other place has been notified by Registrar
  • S229(1) - copies and memoranda must be open to inspection by any member of the company without charge
26
Q

What are the restrictions re private companies giving loans?

A
  • Private companies are restricted from giving loans and security / guarantee to directors only
  • Public companies = restricted from granting loans, quasi-loans, credit transaction, security & guarantee to directors and persons connected as well.
27
Q

What are the 7 steps of giving loans to directors?

A
  1. Nature of the company
  2. Nature of transaction
  3. Shareholder approval required, which company needs to get shareholder approval
  4. Are there any statutory exceptions
  5. Sanctions for not getting shareholder approval
  6. Defence / exemption
  7. Director complying with duties
28
Q

Explain step 1/7 of giving a loan to directors:

What is the nature of the company?

A
  • Any company (s197)
  • Plc and associated companies (s197, s198, s200, s201)
  • Associated bodies corporate (s256)
29
Q

Explain step 2/7 of giving a loan to directors:

What is the nature of the transaction?

A
  • Loan
  • Quasi-loan
  • Credit transaction
  • Guarantee/security
30
Q

Explain step 3/7 of giving a loan to directors:

Shareholder approval required?

A

− Loans to director (s197)
− Quasi-loans to directors (s198)
− Loans or quasi-loans to persons connected with director (s200)
− Credit transaction (s201)
− Guarantee or security (s197, s198, s200, s201)

  • If the director is of the company’s holding company, transaction must also have been approved by the members of the holding company (s197(2) & ss (3) of all other aforementioned)
31
Q

Explain step 4/7 of giving a loan to directors:

Exceptions (statutory) if shareholder approval IS required?

A
  • S204 - 209
  • S204 is the main exception. Approval not need for anything less than £50,000.
  • S207: approval not needed if the aggregate of the transaction and the value of any other relevant transactions / arrangements do not exceed £10,000
32
Q

Explain step 5/7 of giving a loan to directors:

Sanctions for not obtaining s/h approval?

A
  • S213 + s214
  • Transaction is voidable UNLESS: restitution / company has been indemnified for loss or damage resulting from the transaction
  • Rights acquired in good faith / for value / without notice of the contravention would be affected by the avoidance
33
Q

Explain step 6/7 of giving a loan to directors:

Defences?

A
  • For s200, 201 or 203 – ‘reasonable steps’ defence.
  • For any connected person & director who authorized the transaction – s213(6) – no knowledge of the circumstances constituting the contravention.
34
Q

Explain step 9/7 of giving a loan to directors:

Directors duties?

A
  • Duties under s172-177
  • Sanctions are in s178 if they do not comply
  • AoA may prevent directors from counting in quorum and voting on BR in respect of transactions in which they are interested - MA 14(1)
35
Q

For approval of giving a loan to a director, explain the OR which must be passed?

A
  • Memo
  • Setting out the details of the transaction, nature / amount and extent of company liability
  • to be made available to all members for inspection at RO at least 15 days ending with the date of the GM.
  • If being passed as a WR, then the memo can be set out with the WR.
36
Q

What is a quasi-loan?

A
  • E.g. when the company makes a payment that the director is bound to make personally on terms that the director will repay the company later.
37
Q

What is a credit transaction?

A
  • E.g. when the company supplies anything other than cash to the director on terms that the director will pay for it later
38
Q

What is a Close Company? Where is it defined?

A
  • S439 CTA 2010: If under the control of – 5 or less ppts, any number of ppts who are also directors, i.e. if shre shareholder is also a director.
39
Q

What is a participator for a Close Company?

A
  • A person having a share/interest in the capital/income of the company (shareholder!)
40
Q

What is “control” in terms of the definition of a close company?

A
  • Ability to exercise control over company by voting rights e.g. holding more than 50% of voting shares
41
Q

What is the special rule re tax effect of loans to participators?

A
  • Company must pay corporation tax to HMRC at a rate of 25% of the loan within 9 months & 1 day of the accounting period in which the loan was made. There is no tax effect on the participator.
42
Q

What is the effect if a loan is written off / repaid / satisfied?

A

(1) Company: Refunded by HMRC
(2) Participator: Deemed to have received a windfall equal to the amount of the loan written off/waived. This is assessed as dividend income .: a higher rate taxpayer will have to pay additional tax on the sum written off/waived. No tax effect if loan is paid off in full.

43
Q

What is the purpose of the rule for tax effect of loans to participators?

A
  • To stop the loophole of paying shareholders by way of loans
  • Which will never be repaid