The directors

Question 1

How does the CA2006 define a director?

What is an executive director?

What is their role?

Are they employees?

Do they have a contract of employment/service contract?

Where is the appointment of an executive director governed?

Answer 1

S.250 = any person occupying the position of director, by whatever name called (including corporate bodies with a legal persona)

A senior company executive responsible for day-to-day management who is on the board e.g. CEO or CFO

Role = implement company strategy

Yes, usually full time employees

Yes

The Articles

Question 2

What is a non-executive director?

What is their role? (2)

Are they employees?

Do they have a contract of employment/service contract?

Where is the appointment of a NED governed?

What does the UK CG Code say about the number of NEDs?

What are the 7 factors that can impair a NEDs independence?

Answer 2

= A director without executive responsibilities

Role = (1) Contribute skills and experience to board decision-making and (2) provide balance/challenge to proposals brought by the executive directors

No, usually part-time

No

Terms of appointment set out in letter of appointment

Provision 11 UK CG Code = at least 1/2 board, excluding the chair, should be independent NEDs

Provision 10 UK CG Code = circumstances likely to impair independence = director:
1. Employee of company in last 5 years
2. Recent (last 3 year) material business relationship
3. Receives additional remuneration, member of pension scheme, participates in share options or performance-related pay scheme
4. Close family ties
5. Holds cross-directorships
6. represents a significant shareholder
7. Served on the board for 9+ years since first appointed

Question 3

What is a shadow director?

Are shadow directors deemed to be directors of the company for all purposes?

Why is this important?

Are professional advisors shadow directors?

Answer 3

= any person who has not been formally appointed as a director, does not openly participate in managing the company, but on whose instructions the directors are accustomed to act e.g. majority or significant shareholder

S.251 CA2006 = yes

During insolvency, liquidator/receiver will assess if any wrongdoing was committed and if they should be held accountable

• No, if they restrict their advice to their area of expertise (accountancy) and only attend board meetings for their relevant area of expertise
• Yes, if they provide wide-ranging advice which the directors regularly take or act upon

Question 4

What is a de facto director?

What is the difference between a de facto director and a shadow director?

Are de facto directors deemed to be directors of the company for all purposes?

Answer 4

= a person who has not been formally appointed as a director but holds themselves out to be a director and carries out the acts and duties of a company director

A de facto director actively holds themselves out to be a director
A shadow director does not hold themselves to be a director

S.250 CA2006 = yes

Question 5

What is an alternate director?

Do the MA permit alternate directors?

How are appointments of an alternate effected? (2)

What should happen if the alternate is not already a director?

Is an alternate director responsible for their own acts and omissions?

What are the 3 ways an alternate director’s office ends?

Answer 5

= a person appointed by an existing director to act on their behalf in their absence

MA. 25 for Plc = yes, a director may appoint another director or other person to be their alternate subject to that person being approved by the board
MA for Ltd = no

Any appointment of an alternate must be effected by:
1. A written notice signed by the director making the appointment and
2. A statement signed by the proposed alternate that he is willing to act as an alternate

Their particulars should be entered on the register of directors and details of their appointment notified to the Registrar using Form AP01

Yes - they will not be deemed to be an agent of the appointing directors

A. Alternate resigns
B. Appointing director revokes their appointment at any time by notice in writing to the company
C. If an appointing director ceases to hold office = the alternate director will automatically cease to hold office (unless the alternate director is already a director of the company)

Question 6

Under CA2006, what are the 2 eligibility criteria to satisfy when appointing directors?

Where else may additional eligibility criteria be?

Who are the 5 prohibited groups of people who cannot be appointed as director?

Answer 6

S.155 and 157 = 1. must be at least 1 natural director appointed at all times and 2. on appointment that person must be at least 16

In the Articles e.g. hold a min no. of shares or a particular qualification

Prohibited = someone who:
1. Is bankrupt
2. Has been disqualified
3. Is the auditor of a company
4. Is a director of an insolvent company being appointed as director of company with ‘prohibited’ name
5. Doesn’t meet specific criteria in Articles

Question 7

How are the first directors of a company appointed?

How are subsequent directors appointed? (2)

What are the 3 steps for the appointment of a director?

Answer 7

Via form IN01 submitted to the Registrar for incorporating the company

Governed by Articles:
1. Board may appoint additional directors
2. Members may do so in a general meeting by ordinary resolution

Checklist:
A. Obtain written confirmation from appointee that they consent to be appointed
B. Board resolved to appoint new director at BM or by WR
C. Cosec confirms appointment to new director and completes the necessary onboarding steps (form AP01 to CH within 14 days)

Question 8

Name 10 steps in the checklist for director appointments to be taken care of by the cosec.

Answer 8

1. Request personal details = full name, DOB, residential address, service address, nationality, and occupation
2. Update register of directors and register of directors’ residential addresses
3. Submit Form AP01 (natural person) or AP02 (corporate entities) to the Registrar within 14 days of the date of appointment
4. Request the director to give notice of any interests (such as in shares or contracts between the company and customers/suppliers)
5. Provide dates of forthcoming board meetings
6. Enquire how the director wishes to be paid (bank details)
7. Traded companies only = Notify regulatory information service (RIS) of the appointment by the end of the business day following the decision to appoint the director
8. Notify bank if to be signing authority and send specimen signature
9. Notify insurance company of appointment (for directors and officers liability policy)
10. Provide a tailored induction to director = copies of Articles, policies, reports, accounts

Question 9

Why are director inductions important?

What are the 3 broad topics individual induction arrangements and briefing materials should cover?

Why are directors required to give details of a service address?

Can a service address be the same as a residential address?

Which 2 addresses cannot be used as a residential address?

Answer 9

So directors can make an effective contribution to the board as soon as possible

1. Internal policies and procedures (Health and safety, matters reserved for the board etc.)
2. External legislation (including responsibilities, duties, and potential liabilities)
3. Codes of practice and industry & company specific information (UK CG Code)

Service address = for receipt of official notices

Yes, but if not the same, details of residential address must be on Form AP01 on appointment and changes on Form CH01

A. Accommodation addresses
B. PO Box numbers

Question 10

What is the minimum number of directors a Plc and Ltd can have according to CA2006?

What happens if the number of directors falls below the minimum and what is recommended once the minimum number is reached again?

What happens if an appointment is found to be defective in any way? (2)

Answer 10

S.154 = Plc = at least 2
S.155 = Ltd = at least 1

Remaining directors have power to fill a casual vacancy or to convene a GM to allow members to appoint additional director(s) and recommended the board ratify any decisions made while there were insufficient directors

S.161 CA2006 = any earlier acts made by the person acting as a director remain valid (to protect 3rd parties)
S.239 CA2006 = members may ratify prior acts of directors for acts of negligence, default, breaches of duty, breaches or trust

Question 11

Executive directors have service contracts.

What does s.188 CA2006 say?

How is member’s approval given?

What does s.228 CA2006 say?

What does the UK CG Code say on the length of service contracts?

Answer 11

S.188 CA2006 = directors’ service contracts must not exceed 2 years duration without shareholder approval

Given by ordinary resolution passed at a GM

S.228 CA2006 = companies must keep copies of directors’ service contracts available for inspection by members at all times

UK CG Code = notice or contract period should be one year or less

Question 12

CA2006 codified director’s duties from existing case law (common law) and equitable principles.

What is the s.171 CA2006 duty?

How can the cosec assist with director’s compliance?

What is general management clause?

Do directors have unfettered authority to exercise the company’s powers?

How does s.40 CA2006 protect 3rd parties when directors have exceeded their authority?

Answer 12

S.171 = directors must act in accordance with the company’s constitution (articles, resolutions and other agreements/decisions) and only exercise powers for the purposes for which they are conferred

Cosec must ensure the constitution is up to date and copies are available and circulated to directors on induction and when changes are made

MA. 3 = subject to the Articles, the directors are responsible for management of the company, for which purpose they may exercise all the powers of the company

No. Their authority is subject to any provisions in the Articles, their service contract, and any authority limits adopted by the board

S.40 = In favour of a person dealing with the company in good faith, the power of the directors to bind the company is deemed to be free of any limitation = A 3rd party can enforce a transaction

Question 13

What is the s.172 CA2006 duty?

Answer 13

S.172 = a director must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard to:
* Likely long-term consequences
* Employees’ interests
* Need to foster business relationships with suppliers, customers, and others
* Impact of operations on community and environment
* Desirability of maintaining a reputation for high standards of business conduct
* Need to act fairly as between members

Question 14

What is the s.173 CA2006 duty?

What are the 2 circumstances when this is not infringed?

Can directors seek advice from suitably qualified professionals?

Answer 14

S.173 = directors must exercise independent judgement

Not infringed in circumstances where:
1. An agreement, validly entered into, restricts the future use of discretion by the directors
2. Directors’ act in accordance with the company’s constitution

Yes and may act on that advice, but should not do so blindly without reviewing, challenging, and seeking to understand it

Question 15

What is the s.174 CA2006 duty?

What is the standard and the 2 tests?

What does this mean?

What is the leading case on this duty? Briefly explain it.

Answer 15

S.174 = directors must exercise reasonable care, skill and diligence

The same standard that would be exercised by a reasonably diligent person with the:
○ General knowledge, skill and experience that may reasonably be expected of the person carrying out the same functions as a director (objective test); and
○ General knowledge, skill and experience that the director actually has (subjective test)

If a director has a particular skill or greater knowledge in an area, they will be held to a higher standard.

Re City Equitable Fire Insurance Co. Ltd 1925 = directors delegated virtually all management to managing director (MD). MD stole cash from company because of inadequate supervision from other directors. Directors were in breach of their duty of skill and care

Question 16

What is the s.175 CA2006 duty?

What does this particularly relate to?

What does this duty not apply to?

When is this duty not infringed?

How can a Ltd authorise?

How can a Plc authorise?

When is authorisation valid?

Answer 16

S.175 = directors must avoid situations in which they have or can have a direct or indirect interest that conflicts or might conflict with the interests of the company

Relates particularly to the exploitation of any property, information, or opportunity regardless of whether the company could take advantage or not

Duty does not apply to conflicts arising out of transactions or arrangements between the company and the director (dealt with in s.177)

Duty is not infringed in circumstances where the remaining directors authorise the conflict (transaction)

○ Ltd = authorisation may be given by resolution of the directors unless Articles state otherwise (MA 14 ltd = yes)

○ Plc = authorisation may only be given by resolution of the directors if Articles permit (MA 16 plc = yes)

Authorisation is only valid if necessary quorum is present excluding the director with the conflict of interest and without that director voting

Question 17

What is the s.176 CA2006 duty?

What is the exception?

When is this duty not infringed?

Answer 17

S.176 = a directors must not accept benefits from a 3rd party conferred by reason of his being a director, or his doing (or not doing) anything as a director

Benefits received by a director from a person by whom their services are provided

Duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest

Question 18

What is the s.177 CA2006 duty?

What are the 3 categories of conflicts it relates to?

How may declaration be given? (2)

What are the 4 circumstances when notification is not required?

Answer 18

S.177 = directors must declare full nature and extent of any direct or indirect interest in any proposed transaction or arrangement before that transaction or arrangement is entered into

(i) contracts, (ii) substantial property transactions, and (iii) loans to directors

Declaration may be given at a meeting of the directors or in writing and given to every director in accordance with s.184 CA2006

Notification is not required where:
1. The director is not aware of the interest or is not aware of the transaction or arrangement
2. The nature of the interest cannot reasonably be regarded as likely to give rise to a conflict of interest
3. The other directors are already aware of the interest
4. The transaction relates to the director’s service contract

Question 19

What are the 3 ways a director is vacated from office?

Name 2 examples of the 2nd way.

Name 5 examples of the 3rd way.

Do the remaining directors need to approve the resignation of a director?

How soon must notification of the vacation of office by a director be notified to Companies House?

Answer 19

1. On the death of the office holder
2. Under statute
3. Under a provision in the Articles

Under statute:
○ S.11 CDDA1986 = if the director becomes bankrupt (unless the courts permit the appointment)
○ S.1-6 CDDA1986 = if director is disqualified from being a director by court order

Under Articles:
○ Director appointed for a fixed term and, on expiry of that term, their appointment automatically ceases

○ Articles stipulate qualifying criteria (minimum shareholding, professional qualification etc.) and the criteria has not been met

○ Resignation = usually take effect from the date on which the letter of resignation is received by the company, unless a subsequent date specified in letter (do not need to resign in writing but should still give resignation letter)

○ Absence = if director is absent from board meetings for some specified period (often six months) without leave of absence

○ Non-reappointment under retirement by rotation

No, but should be noted at next board meeting

Within 14 days of the director vacating office

Question 20

How often must directors of Plc (and Ltds that chose to hold an AGM) put themselves forward for re-appointment?

What do the MA for Plc say on directors’ retirement by rotation?

What does the UK CG Code say on retirement by rotation/re-appointment?

What are the 5 steps in the procedure for retirement by rotation?

Answer 20

MA. 21 Plc = all directors put themselves forward for re-appointment at AGM at least every 3 years

MA. 21 Plc = provides for the retirement of 1/3 of the total number of director by rotation every year

UK CG Code = all directors should offer themselves for re-appointment every year

Procedure depends on Articles but will typically be:
1. At first AGM, all directors retire and offer themselves for re-appointment by members

2. At subsequent AGMS, 1/3 directors retire from office
3. The directors to retire are those who have been in office longest since their last election
4. Directors retiring by rotation are eligible for re-appointment, but members may not re-appoint
5. In plc, the resolutions at a GM for the appointment or re-appointment of directors must be voted on individually unless members unanimously agree that the appointments or re-appointments may be made by a single resolution

Question 21

How is a director removed from office under CA2006?

What are the 4 conditions for removal to be valid?

The Articles cannot exclude S.168 CA2006, but name an example of an additional provision it might contain for removal of directors.

Does a removal stop the director from being able to exercise any rights they may have to compensation or damages payable?

Answer 21

S.168 = regardless of service contract or provision in Articles, members always have the right to remove directors by ordinary resolution at a GM

1. Special notice (28 days) must be given to the company of the intention to propose such a resolution
2. A copy of the notice must be sent to the director concerned
3. The director concerned may protest his removal, address the meeting, and circulate written representations to the meeting
4. Resolution must be held at a general meeting (WR cannot be used)

Articles may state a director can be removed by unanimous resolution of the other directors

No, they can still exercise these rights

Question 22

What may a person disqualified from being a director not do during the disqualification period?

What are the consequences of contravening a disqualification order?

Name 6 ways directors can be disqualified.

Answer 22

May not be a director, liquidator, administrator, receiver or manager of a company, whether directly or indirectly, without the consent of the court

Contravention = a criminal offence punishable by up to 2 years imprisonment or an unlimited fine

Directors can be disqualified:
1. For unfitness to be involved in management (CDDA1986)

2. For breach of statutory obligations e.g. persistent failure to file accounts or confirmation statements (CDDA1986)
3. For fraudulent or wrongful trading (CA2006/IA1986)
4. In the public interest (Secretary of State has power to apply to the courts for a disqualification order on the grounds of public interest)
5. By voluntary undertakings
6. On competition grounds

Question 23

What is a disqualification undertaking?

What is a competition disqualification order?

What is a competition undertaking?

Answer 23

Disqualification undertaking = Secretary of State accepts an undertaking from a director who is subject to ss. 7 and 8 CDDA1986 that he will not engage in ss.1 and 1A CDDA1986

Competition disqualification order = courts must make a disqualification order against a director who committees a breach of competition law and the courts deem them to be unfit for management

Competition undertaking = Competition and Markets Authority (CMA) accept a disqualification undertaking from a director where the CMA believes the company has committed a breach of competition law and deem the director to be unfit for management

Question 24

What are 8 steps in the checklist for the vacation of office by a director?

Answer 24

1. If vacation is voluntary = obtain a letter of resignation from director
2. Listed companies should notify UKLA and make a market announcement without delay
3. Note the vacation of office at the next board meeting
4. Note the date of ceasing to be a director in the register of directors
5. Notify the Registrar using Form TM02 or TM01 within 14 days of the date of cessation
6. Notify bank and amend any bank mandate(s)
7. Notify insurance company
8. The director should be requested to return all company documentation and property (e.g. office keys, laptop, car)

Question 25

Why is succession planning important?

What does Principle J of the UK CG Code say on succession plans?

What does Principle K of the UK CG Code say?

In drawing up succession plans, what are the 4 things boards and nomination committees must ensure that their plans deliver?

Is positive discrimination permitted to help with these 4 things?

Answer 25

To ensure an orderly succession and to maintain the necessary balance of skills, experience, diversity, and independence

Principle J = an effective succession plan should be maintained for board and senior management … promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths

Principle K = the board and its committees should have a combination of skills, experience and knowledge … and membership regularly refreshed

Must deliver appropriate:
* Skills
* Expertise
* Diversity (Women and BAME)
* Independence (Provision 11 = 1/2 board, excluding the chair)

No = Principle J = appointments and succession plans should be based on merit and objective criteria

Question 26

DIVERSITY
What were the 3 findings in the 2023 FTSE Women Leaders Review?

Name a recommendation in the 2021 Hampton-Alexander Review?

Answer 26

By the end of 2022:
* FTSE350 met 40% of women on boards target 3 years ahead of December 2025
*33% of FTSE 250 Combined Executive Committee & Direct Reports are women
* 34.3% of the top 50 largest private companies’ Leadership are women

Companies should have a woman in at least 1 of the 4 roles of Chair, CEO, SID and CFO

Question 27

DIVERSITY
What 2 things did the 2017 Parker Review Committee recommend?

What was the finding in the 2021 Parker Review Report?

Answer 27

2017 Parker Review Committee recommended:
* Each FTSE 100 board should have at least 1 BAME director by 2021
* Each FTSE 250 board should have at least 1 BAME director by 2024

2021 Parker Review Report = by March 2021, 81 of FTSE 100 companies had met the challenge

Question 28

D&O INDEMNIFICATION & LIABILITY INSURANCE

What 3 things does the CA2006 permit regarding directors’ and officers’ indemnification and liability insurance?

What do the MA say?

What are the 2 costs that are covered by D&O insurance for civil proceedings brought by 3rd parties?

Answer 28

CA2006 permits that:
1. Directors and officers may be indemnified against civil proceedings brought by 3rd parties and criminal proceedings
2. Companies may reimburse directors for costs incurred prior to outcome of proceedings
3. Indemnities may only reimburse costs incurred in a successful defence

MA.85 for plc and MA.52 for ltd = company may indemnify every director or officer against any civil or criminal proceedings and maintain such insurance at the expense of the company

both defence costs and damages

Question 29

D&O INDEMNIFICATION & LIABILITY INSURANCE

Under CA2006, what can companies not exempt a director from?

What happens when a company brings an action against one of its own directors?

Can the details of any indemnity be kept secret?

Answer 29

S.232 CA2006 = companies cannot exempt a director from liability in respect of negligence, default, breach of duty or breach of trust

= director’s defence costs may be paid by the company as they are incurred BUT:
* These defence costs are usually repayable by the director if he unsuccessfully defends the company’s claim
* Director is personally liable to pay any damages awarded to the company or any fines imposed on them

No = qualifying indemnity provisions must be disclosed in company’s directors’ report and be available for inspection by members

Question 30

What is co-option?

What are the 3 conditions for co-option to be possible?

Can a person be co-opted to a board without their consent?

Under what section of the CA2006 can a director apply to the Registrar to have the appointment struck out?

Which form is applicable?

Answer 30

Co-option is sometimes used to refer to situations where a director is appointed in between AGMs

Usually possible provided that:
○ The directors have authority to fill casual vacancies
○ The person concerned has consented to be a director
○ The maximum number of directors set out in the Articles has not been exceeded

No - a person appointed as director without their consent can apply to the Registrar to have the appointment struck out

S.1095 CA2006

Form RP06

Question 31

DISQUALIFICATION OF DIRECTORS

Where will disqualification proceedings be heard?

If a director is disqualified what will the court do?

What should a company looking to appoint a director of another company that went into liquidation a few years ago do before appointing them? (2)

Answer 31

In court

Inform the Registrar so the register of disqualified directors can be updated

1. Check if liquidation was solvent or insolvent = can be found from records at Companies House (if solvent unlikely to be disqualified if insolvent might have been disqualified for unfitness (CDDA1986) or wrongful trading etc. (IA1986))
2. Check the Register of Disqualified directors = a public register, accessible online