Unit 4 Directors

Question 1

Directors’ decision- making

Answer 1

Directors make decisions collectively in board meetings - called board resolutions.

The CA and model articles set out various requirements which must be satisfied in order for a board meeting to be valid.

Directors can delegate their powers as they see fit.

Question 2

Notice of board meetings

Answer 2

Directors must give reasonable notice to call board meeting - depends on facts.

No need for notice to be in writing but it must include the time, date and place of the meeting.

Question 3

Quorum at board meetings

Answer 3

MA11 - A quorum of two directors must be present at all times during a board meeting.

Question 4

Directors’ personal interests

Answer 4

MA14 - A director may not count in the quorum or vote if a proposed decision of the board is:
* concerned with an actual or proposed transaction or arrangement with the company
* in which a director is interested.

Can be disapplied by articles.

s177 CA - Must declare personal interest.

Question 5

Exceptions to declaring personal interests

Answer 5

1. if it cannot reasonably be regarded as likely to give rise to a conflict of interest;
2. if the other directors are already aware of it; or
3. if it concerns terms of a service contract that have been or are to be considered…by a meeting of the directors.

Obligation to declare cannot be misapplied by articles.

Question 6

Voting at board meetings

Answer 6

Board resolutions are passed by a simple majority (over half of those present must vote in favour).

Everyone has one vote apart from chair gets an extra vote.

Question 7

Unanimous decisions

Answer 7

It is possible to pass a board resolution in the form of a resolution in writing or any other method which shows that all eligible directors have indicated to each other that they share a common view on the matter. To use this method the directors must vote unanimously in favour of a resolution.

Question 8

Who can be a director/numbers required

Answer 8

All companies must have at least one director, and public companies must have at least two directors.

Do not have to be a natural person (human being), but every company needs at least one director who is a natural person who is 16+

Question 9

Type of director

Answer 9

= any person occupying the position of director, by whatever name they are called.

Executive = appointed to the board of directors and also have an employment contract with the company.

Non-executive directors = appointed to the board and will be registered at Companies House as directors of the company, but they will not have service agreements with the company. So do not therefore receive a salary, but they will receive directors’ fees for attending board meetings.
Common in publicly traded companies as sometimes required by law to have them to prevent poor decision making by directors that are too invested.

Question 10

Chairperson

Answer 10

The directors may appoint a director to chair board meetings (MA12(1)), and can do so by passing a board resolution.

Run the company’s board meetings. The only additional power the chair has by virtue of their appointment as chair is a casting vote at board meetings (MA13).

If the board of directors does have a chair, this person will also chair general meetings, if they are present and willing to do so (MA39(1)).

In a public company, the chair of the board acts as a figurehead in dealings with shareholders and anyone outside the company.

Question 11

De facto directors

Answer 11

Fall within definition of director.

Person who acts as a director although they have never been appointed, or validly appointed.

Question 12

Shadow director

Answer 12

A person in accordance with whose directions or instructions the directors of the company are accustomed to act but not formally appointed.

E.g. major shareholder, lender, management consultant.

Influence and control over directors in practice.

Question 13

Sole directors

Answer 13

In companies with only one director, the director can still validly take company decisions because MA7(2) allows them to make decisions without calling a board meeting.

Question 14

Alternative directors

Answer 14

If a director cannot attend a board meeting, sometimes they will appoint an alternative director to attend and vote in accordance with the wishes of the director who cannot attend.

No provision in the Model Articles; a company that wishes to allow its directors to send an alternative director must include a special article.

Question 15

Appointment of directors

Answer 15

Directors can either be appointed by the board or by ordinary resolution of the shareholders (MA 17).

Question 16

Restrictions on being a director

Answer 16

If disqualified from taking office as director.

Under MA 18, a person will cease to be a director if a bankruptcy order has been made against them or a doctor gives a written opinion to the company stating that they have become physically or mentally incapable of acting as a director, and may remain so for more than three month

Question 17

Administrative requirements

Answer 17

When a new director is appointed, the company must notify Companies House within 14 days of the appointment (s 167(1)(a) CA 2006), and this will be done by filing form AP01 (for the appointment of an individual director), or form AP02 (for the appointment of a corporate director).

The company must also enter the director on its register of directors and register of directors’ residential addresses.

Question 18

Directors’ authority

Answer 18

Actual authority arises where a director has consent from the other directors to act in a certain way.
Express = set out in the director’s service contract, or it may have been given following a discussion between the board of directors.
Implied = the director has acted that way in the past and the board has not tried to stop the director or told them that they are not authorised to act in that way.

Apparent authority = the director acts without the company’s prior consent, whether express or implied, but still binds the company to the contract. Effectively the company is estopped from denying the director’s authority. Apparent authority is based on a representation to the third party.

If no authority director personally liable to third party and company not party to contract/liable to third party.

Question 19

Directors’ service contracts

Answer 19

Directors decide terms of a directors service contract.
Exception: where the board is proposing to enter into a service contract with a guaranteed term of more than two years - must be approved by ordinary resolution.
If not guaranteed term not enforceable.
Fine if can end it with notice of 2 years or less.

When the board proposes an ordinary resolution it must keep a copy of the memorandum setting out the terms of the proposed service contract at the registered office for 15 days prior to the general meeting, and at the general meeting itself. If the ordinary resolution is proposed by written resolution, a copy of the memorandum must be circulated to the shareholders along with the written resolution.

Directors’ service contracts (or a memorandum setting out their terms) must be available for inspection by the shareholders at the company’s registered office during their term and until a year after termination of the service contract.
Shareholders have the right to inspect them without charge and within seven days of requesting to see them.

Question 20

Directors service contracts - only 2 directors

Answer 20

Directors will not be able to approve service contracts at board meetings, because the director in question will be prevented from counting in the quorum and voting by virtue of MA 14, because of their personal interest in the service contract.

One solution to this is to change the company’s articles permanently, by special resolution under s 21 CA 2006, allowing directors to vote even when they have a personal interest in the matter in question, or just to allow them to vote when the subject under discussion is their service contract.

Alternatively, the shareholders could temporarily suspend operation of MA 14 by ordinary resolution under MA 14(3).

Question 21

Resignation of director

Answer 21

If a director resigns, they must complete form TM01 (if they are an individual), or form TM 02, if the director is a company, within 14 days of resignation.

The director will have to notify Companies House of their resignation, or, if their service contract was well drafted, it will contain a clause giving the company power of attorney to complete the TM01 form on the director’s behalf.

Question 22

Removal of a director

Answer 22

Ordinary resolution with special notice (notice given to company at least 28 days before GM where resolution proposed).
Company must inform director forthwith and give shareholders at least 14 days before GM.

Director has opportunity to speak at GM and require company to send any written representations to shareholders.

If, after special notice has been given to the company, a general meeting is called for 28 days or less after the notice has been given, the notice is deemed to have been properly given (s 312(4)). This provision is designed to prevent the board from calling a meeting before the 28 days’ special notice has expired in order to frustrate the shareholders’ intention to dismiss
the director.

If board unwilling to call GM, shareholders requisition a GM.

Question 23

Service contract vs removal

Answer 23

Removing a director will not terminate the director’s service contract: this can only be terminated in accordance with its terms, unless the director is in repudiatory breach of their service contract and can be summarily dismissed on that basis.

Similarly, ending a director’s service contract does not mean that the director will automatically be removed from the office of director.

Question 24

Bushell v Faith clause

Answer 24

Sometimes added to companies articles.

= give someone who is both a shareholder and a director greater voting rights as a shareholder if the resolution in question is a resolution to remove that person as a director.

Question 25

Directors notification requirements

Answer 25

Set out in CA 2006. 1. Companies must keep a register of directors, containing required particular including the director’s date of birth and address (for individuals) and the company’s registered office. The register of directors must be available for inspection without charge by shareholders, or by other individuals following payment of a fee, at the company’s registered office. Criminal offence. Can elect not to keep a register of directors on the central register at Companies House instead of at office. 2. Companies must keep a register of directors’ residential addresses, for individual directors only. Not open to inspection. Can elect not to keep a register of directors on the central register at Companies House instead of at office. 3. Companies House forms CH01 and CH02 are used to notify a change in particulars for natural persons and corporate directors. 4. Forms AP01 (for human directors) and AP02 (for corporate directors) are used to notify Companies House of the appointment of a director, and they must be filed within 14 days of the appointment. Forms TM01 (for human directors) and TM02 (for corporate directors) are used to notify Companies House of the resignation or removal from office of a director. These must be filed at Companies House within 14 days of the resignation or removal from office.

Question 26

Duties - Duty to act within powers – s 171 CA 2006

Answer 26

A director of a company must: (a) act in accordance with the company’s constitution, and (b) only exercise powers for the purposes for which they are conferred. Company’s constitution = referring to its articles of association, although various other resolutions and agreements are also classed as part of the company’s constitution, including special resolutions.

Question 27

Duties - Duty to promote the success of the company – s 172 CA 2006

Answer 27

A director must act in the 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. When acting, directors must have regard, amongst other things, to the following six factors: (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. Subjective test. Success? For a commercial company equates to an increase in share value.

Question 28

Duties - Duty to exercise independent judgement – s 173 CA 2006

Answer 28

Directors must exercise independent judgement. This is not infringed by the director acting: (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company’s constitution.

Question 29

Duties - Duty to exercise reasonable care, skill and diligence – s 174 CA 2006

Answer 29

This means the care, skill and diligence that would be exercised by a reasonably diligent person with: (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and (b) the general knowledge, skill and experience that the director has

Question 30

Duties - Duty to avoid conflicts of interest – s 175 CA 2006

Answer 30

Directors must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company. The duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company – it must relate to a contract in which the company is not involved. There is no breach if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest. In addition, the duty is not infringed if the matter has been authorised by the directors (s 175(4) and (5)). Note that the director in question will not count in the quorum for the vote to authorise the infringement and if they vote, their vote will not be counted, even if MA 14 has been excluded (s 175(6) CA 2006).

Question 31

Duties - Duty not to accept benefits from third parties – s 176 CA 2006A

Answer 31

A director of a company must not accept a benefit from a third party conferred by reason of them either being a director, or doing (or not doing) anything as director. There is no breach if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Question 32

Duties - Duty to declare interest in a proposed transaction or arrangement – s 177 CA 2006

Answer 32

If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors. The section refers to the declaration being made at a board meeting or by a general notice in writing to the directors, but also states that the declaration does not have to be made in this way. There are exceptions to this duty to declare, which are: * if the director is not aware of the interest, or of the transaction or arrangement in question (and a director is treated as being aware of matters of which he ought reasonably to be aware); * if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest; * if, or to the extent that, the other directors are already aware of it (or ought reasonably to be aware of it); or * if it concerns the terms of the director’s service contract. There must be a transaction or arrangement with the company for this duty to be breached.

Question 33

Civil consequences of breach of directors’ duties under ss 171– 177 CA 2006

Answer 33

The potential remedies for breaches of ss 171– 173 and 175– 177 are: * an account of profits; * equitable compensation for the loss suffered by the company; * rescission of any contract entered into as a direct or indirect result of the breach; * an injunction, to prevent further breaches/ a continuing breach; * restoration of property transferred as a result of the breach of duty. Breach of s 174 is akin to negligence and so the remedy for breach of the duty to exercise reasonable care, skill and diligence is common law damages assessed in the same way as damages for negligence.

Question 34

Duties - Ratification of breach

Answer 34

By ordinary resolution. If the director in question is also a shareholder, they will not be an eligible member(if written)/to vote (if GM). Nor can any person connected with him count in the vote.

Question 35

Declaration of interest in existing transaction or arrangement – s 182 CA 2006

Answer 35

Where a director of a company is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors. The declaration must be made as soon as is reasonably practicable. This section does not apply if already declared the interest under s 177. Must be made at a meeting of the directors, or by notice in writing sent to all of the other directors, or by general notice of the interest given at a board meeting. Exceptions * if the director is not aware of the interest, or of the transaction or arrangement in question (and a director is treated as being aware of matters of which he ought reasonably to be aware); * if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest; * if, or to the extent that, the other directors are already aware of it (or ought reasonably to be aware of it); or * if it concerns the terms of the director’s service contract. Criminal offence punishable by a fine.

Question 36

Claims against directors of insolvent companies - Wrongful trading

Answer 36

Court may order a director to contribute to the company’s assets if: * the company has gone into insolvent liquidation or insolvent administration; * before commencement of the winding up of the company, the director knew or ought to have concluded there was no reasonable prospect that the company would avoid insolvent liquidation; and * that person was a director of the company at the time. - Defence: if they took every step with a view to minimising the potential loss to the company’s creditors as they ought to have taken. - Two- part test that examines the facts that a director ought to have known or ascertained, the conclusions which they ought to have reached and the steps which they ought to have taken. - Standard reasonable director. - The first limb of the test is objective. The second limb of the test is subjective. Directors should: * seek professional advice from solicitors and/ or accountants at the first sign of problems; * limit spending; * check the company’s accounts regularly; * keep records of their own actions. Claims brought by a liquidator or administrator.

Question 37

Claims against directors of insolvent companies - Fraudulent trading under s 213 IA 1986

Answer 37

If, in the course of the company being wound up, it appears that the company’s business has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose. Court may declare that any persons who were knowingly parties to the carrying on of the business in such a manner are liable to make such contributions (if any) to the company’s assets as the court thinks proper. Actions brought by the liquidator or administrator. Successful claims for fraudulent trading are uncommon as difficult to find evidence o intention to defraud in order for the definition of fraudulent trading to be met. Also risk of criminal conviction.

Question 38

Claims against directors of insolvent companies - Misfeasance

Answer 38

= breach of any fiduciary or other duty by directors. During the course of the winding up of the company, directors may be ordered to contribute to the company’s assets by way of compensation in respect of the misfeasance. They may also be ordered to repay, restore or account for any money or property or any part of it that has been misapplied in breach of duty.

Question 39

Controls on directors - Substantial property transactions

Answer 39

Where: * a director, in their personal capacity, or someone connected with a director * buys from or sells to the company * a non- cash asset (any property or interest in property other than cash, loans not covered) * of substantial value (over 100k OR more than 5k and more than 10% of companies net asset value) Connected persons = Member of a director’s family or a company in which the director or a person/ persons connected with a director (or the director and persons connected with the director taken together): * own/ owns at least 20% of the body corporate’s shares; or * is/ are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company. Members of a director’s family are defined as: * spouse or civil partner; * child or stepchild; * parents; * any person who lives in an enduring relationship with the director as their partner; and * any children of a person who lives in an enduring relationship with the director as their partner. Need ordinary resolution. If the director or connected person is also a director of the company’s holding company or a person connected with such a director, the transaction or arrangement must also be approved by ordinary resolution of the parent company. Exceptions when don't need ordinary resolution: * an SPT when the company in question is a wholly owned subsidiary of any other company; * a transaction between a company and a person in his character as a member of the company; * a transaction between a holding company and its wholly owned subsidiary; or * a transaction between two wholly owned subsidiaries of the same holding company. If no ordinary resolution transaction voidable. Account for any gain made and indemnify company for any loss or damage: * any director of the company (or of its holding company) with whom the company entered into the arrangement; * any person with whom the company entered into the arrangement who is connected with a director of the company or of its holding company, and the director with whom any such person is connected; and * any other director of the company who authorised the arrangement

Question 40

Controls on directors - loans to directors

Answer 40

Need ordinary resolution for company or its holding company to give loan (or give any guarantee of security in relation to such a loan) to a director. If the director receiving the loan is also a director of the company’s holding company, the holding company must also pass an ordinary resolution. A memorandum setting out the terms of the loan and the company’s liability must be made available for inspection at the company’s registered office for 15 days prior to the general meeting at which the ordinary resolution will be proposed, and at the general meeting itself. If written resolution, a copy of the memorandum must instead be sent out with the written resolution and does not need to be available for inspection at the company’s registered office. Exceptions where don't need resolution: * expenditure on company business. This covers expenditure for the purposes of the company or for the purposes of enabling the director to properly perform their duties. maximum of £50,000; * expenditure on defending civil or criminal proceedings in relation to the company or an associated company; * expenditure on defending regulatory proceedings or defending himself or herself in an investigation by a regulatory authority; * minor and business transactions, as long as the transactions and any other relevant transaction or arrangement does not exceed £10,000. Consequences: - transaction voidable - director who loaned the money from the company and any director who authorised the transaction are liable to account to the company for any gain they have made, and are jointly and severally liable to indemnify the company for any loss or damage resulting from the transaction or arrangement. Transaction can be affirmed within a reasonable time. So most likely where company becomes insolvent and insolvency practitioner appointed.

Question 41

Controls on directors - long term service contract

Answer 41

The company may not enter into a service contract with a director for a guaranteed term of more than two years unless the shareholders have authorised the guaranteed term element of the service contract by ordinary resolution (s 188 CA 2006).

Question 42

Controls on directors - Payment for loss of office

Answer 42

When a directorship ends, the director will often receive payment. Also includes where the director is selling their shares in the company and the price is in excess of the price other shareholders could have obtained. Due to service contract or compensation for unfair or wrongful dismissal or discrimination. Need prior ordinary resolution for any payment £200 or more, other than those which director is legally entitled to. Also applies to: * payments to past directors; * payments to a person connected with a director; * payments to any person at the direction of, or for the benefit of, a director or a person connected with a director (shadow director) Memorandum containing particulars of the payment for loss of office must be drawn up and made available at the company’s registered office for not less than 15 days prior to the GM and at the general meeting itself. If written resolution, the memorandum must instead be sent to all eligible shareholders, either with the written resolution or before the written resolution is circulated. If the company makes a payment in breach of s 217, the money is held by the recipient on trust for the company and any director who authorises the payment is jointly and severally liable to indemnify the company that made the payment for any loss resulting from it.

Question 43

Other director liabilities

Answer 43

1. Failure to maintain company records is an offence punishable by a fine (s 1135 CA 2006). If the records in question are accounting records, the director(s) in default can be imprisoned for up to two years (s 389). 2. Failure to file certain documents at Companies House. For example, failure to file a special resolution or a memorandum setting out its terms at Companies House within 15 days of it being passed is an offence punishable by fine (s 30 CA 2006). 3. Liability for financial records (s 463 CA 2006). Directors face potential criminal and civil liability for breaches. 4. Liability for breach of health and safety legislation, namely the Health and Safety at Work Act 1974. Directors can be imprisoned for up to two years and fined up to £20,000 for breaches of this legislation. If somebody dies due to management failure, directors can be liable for the common law offence of gross negligence manslaughter. 5. Bribery – the scope of the Bribery Act 2010 is wide 6. Making political donations without shareholder approval. 7. Civil and criminal liability under environmental legislation.

Question 44

Disqualification of directors

Answer 44

Under the Company Directors Disqualification Act 1986, the court may disqualify a person from being a director for 2-15 years. Grounds: * Conviction for an indictable offence * Persistent breaches of companies legislation * Fraud on a winding up * Summary conviction for failure to file a required notice or document * Being an unfit director of an insolvent company * Following an investigation and a finding of unfitness * Fraudulent or wrongful trading * Breach of competition law The most common type of disqualification is for being an unfit director of an insolvent company. Factors which count in the director’s favour include: * employing qualified financial staff; * taking professional advice; and * a personal financial investment in the company. None of the above factors are conclusive on their own.

Question 45

Effects of disqualification

Answer 45

A director subject to a disqualification order cannot without the leave of the court be a director or in any way concerned in the promotion, formation or management of a company. Leave to be a director is rarely granted, but an example of where it may be granted is where the director is not dishonest, the business is profitable (and so unlikely to become insolvent) and there are other directors who could provide a check on the activities of the director in question. Contravention of the disqualification order is a criminal offence and the director could be fined or sentenced to up to two years in prison. A director who is disqualified is personally responsible for the debts of the company if they are involved in the management of the company while disqualified.