WS3: Directors' duties and responsibilities

Question 1

Are directors able to delegate decision making?

Answer 1

Yes - under MA5, particular day to day decision making can be delegated.

Question 2

How many directors must a company have?

Answer 2

Private limited company - one
Public limited company - two

Question 3

What is the minimum age to be a director?

Answer 3

16

Question 4

How is a ‘shadow director’ defined?

Answer 4

A person in accordance with whose directions or instructions the directors of a company are accustomed to act

Question 5

How do duties, obligations and restrictions differ between executive versus non-executive directors?

Answer 5

They do not - they apply equally.

Question 6

When must a company have a company secretary?

Answer 6

When it is a public company

Question 7

How is the appointment of directors governed?

Answer 7

By the Articles of the company

Question 8

Under MA, how are directors appointed?

Answer 8

Ordinary resolution of the shareholders

Decision of the directors

Usual for the board to appoint new directors under MA - easier to implement

Question 9

What must a company do with directors’ service contracts / memoranda of their terms if made orally?

Answer 9

Must keep them at the registered office for inspection by the members.

Question 10

What obligations does a company have regarding identity of its directors?

Answer 10

Must maintain a register of directors and notify Companies House of changes relating to directors

AP01 - appointment of director

AP03 - appointment of secretary

Question 11

What service address can a director use?

Answer 11

Either residential address, or company’s Registered Office

Individual directors will always have to provide their residential address but this can be kept on a secure, private register.

Question 12

What level of disclosure is needed in terms of annual accounts?

Answer 12

Directors’ Salaries, bonus, pension

Compensation paid to current / past directors for loss of office.

Payment made to / received by a person connected to a director / body corporate controlled by a director.

Details of advances / credits given by a company to its directors and guarantees entered into by a company on behalf of directors.

Question 13

How are directors removed from office?

Answer 13

Ordinary resolution

Special notice (28 clear days) is required of such a removal resolution.

Question 14

Can the board remove a director?

Answer 14

Not unless the Articles specifically provide for this.

Question 15

When is a director automatically terminated?

Answer 15

Disqualification

Subject of an individual voluntary arrangement

Bankruptcy

Physically / mentally unfit and will be so for more than 3 months

Question 16

If a director has been disqualified, how can they be involved in the running of a company?

Answer 16

Only with the leave of the court

Question 17

What CH filing requirements are there when a director leaves office?

Answer 17

Update register of directors internally

Give notice to CH by filing form TM01

Question 18

What duty is in S171?

Answer 18

Duty to act within powers; includes a duty to act within the company’s constitution, and a duty to exercise powers for the purposes for which they are conferred

Question 19

What duty is in S172?

Answer 19

Duty to promote the success of the company - for the benefit of the members as a whole.

Defined as a ‘long-term increase in value’

Question 20

What should a director consider when complying with their S172 duties?

Answer 20

Consequences of any decision in the long term

Interests of the company’s employees

Foster company’s business relationship with suppliers / customers /others

Impact of a company’s operations on the community / environment

Act fairly between members

Question 21

What is a S173 duty?

Answer 21

Duty to exercise independent judgment

Cannot fetter the exercise of discretion; can rely on advance from others but must make their own judgments.

This is an individual duty; blindly following another director would violate this

Question 22

What is a S174 duty?

Answer 22

Common law duty to exercise reasonable care, skill and diligence

Raised if director is an expert in something.

Minimum level is that objectively expected of a director in that position.

Question 23

What is a S175 duty?

Answer 23

Duty to avoid conflicts of interest - applies to the exploitation of any property, information or opportunity

Can be authorised by a director

Question 24

What is a S176 duty?

Answer 24

Duty not to accept benefits from 3rd parties

No authorisation here

Question 25

What is a S177 duty?

Answer 25

Duty to declare an interest in a proposed transaction Any director interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors Applies also to indirect interests + must be done in advance.

Question 26

if a director is declaring he has an interest in a transaction, when should this happen?

Answer 26

Can give a one off general notice about their position, but best practice is that a director will announce at a BM, or in writing ahead of the BM.

Question 27

When does a director not need to make a declaration under S177?

Answer 27

Not aware of interest Interest cannot reasonably be regarded as likely to give rise to a conflict of interest if conflict arises because it concerns a service contract and this has been / will be considered by the board / committee of the board / directors

Question 28

How can a company get around the fact that a director interest in a transaction / arrangement with the company cannot vote on / count in the quorum for board resolutions?

Answer 28

MA14(2) says that the conflicted director can count if: - Company disapplies MA14(1) [general rule] by ordinary resolution -Director's interest cannot reasonably be regarded as likely to give rise to a conflict -Director's conflict arises from a permitted cause

Question 29

What remedies are available to the company for a director's breach of duty?

Answer 29

Everything except S174: injunction, setting aside, restitution and account of profits, restoration of company property, damages. S174: damages

Question 30

When are shareholders unable to ratify the acts of a director?

Answer 30

When they are unlawful If there has not been full disclosure by the directors so that shareholders are not fully informed.

Question 31

What can shareholders ratify in terms of breach of duty? By what resolution?

Answer 31

Ordinary Negligence, default, breach of duty, breach of trust

Question 32

Who's votes to ratify a breach will be discounted

Answer 32

Any person interested (e.g. breaching director, connected person).

Question 33

When does a director's long term service contract need approval? How is approval given?

Answer 33

When it is, or may be for a guaranteed period over two years (known as the guaranteed term) Approval given by ordinary resolution

Question 34

What is a guaranteed term in detail?

Answer 34

A period at which the contract is to continue other than at the instance of the company (e.g. director is in control of how long the contract continues), AND during this time the company either can't terminate the contract at all, or can only terminate in specific circumstances Or, the period of notice to be given by the company AND - an aggregate of the above

Question 35

If the director is also a director of a holding company and their long-term service contract needs approval, will holding company shareholders also need to approve?

Answer 35

Yes

Question 36

When is approval of shareholders not required?

Answer 36

No approval is needed of the members of any company which is a wholly owned subsidiary of another company.

Question 37

What are the consequences for a long-term service contract if no approval is given by relevant shareholders?

Answer 37

Provision is void to the extent of the contravention Contract will have a term entitling the company to terminate it any time by the giving of reasonable notice implied into it.

Question 38

What rights do members have to inspect all directors' long term service contracts?

Answer 38

A company must keep all contracts / variations to them in the company's Registered Office for at least one year during and from the date of termination / expiry for members to inspect Members have right to inspect without charge / request a copy for a fee

Question 39

When a long-term service contract is to be passed at a GM, what must happen beforehand?

Answer 39

A memorandum setting out proposed terms of the contract must be available for inspection, for 15 days minimum before the meeting, and at the meeting itself.

Question 40

How can the 15 days notice period be avoided in terms of a directors' service contract?

Answer 40

Using the written resolution procedure - must simply be sent or submitted to every eligible member

Question 41

What is a substantial property transaction?

Answer 41

An acquisition or disposal by a director of a company / director of the company's holding company (or person connected) of a substantial non-cash asset from or to the company.

Question 42

What kind of approval is needed for a substantial property transaction?

Answer 42

Ordinary resolution

Question 43

How is 'substantial non-cash asset' defined?

Answer 43

Not cash Asset must be worth more than £5,000 to be considered If an asset is worth over £100,000, automatically substantial Between £5k and £100k - only substantial if it is worth more than 10% of the company's net asset value.

Question 44

How is a company's net asset value best understood?

Answer 44

That shown in most recent statutory accounts If only recently incorporated and therefore no accounts prepared yet - net asset value is amount of company's called up share capital.

Question 45

What rules are there regarding holding companies / wholly owned subsidiaries in terms of shareholder approval for substantial property transactions?

Answer 45

Members of a holding company have to approve, members of a wholly owned subsidiary do not/

Question 46

What remedies are there if a substantial property transaction is entered into without shareholder approval?

Answer 46

Transaction is voidable at the instance of the company unless: restitution is no longer possible, company indemnified for loss / damage, rights acquired by a third party in good faith would be affected by the avoidance.

Question 47

What defences are available to an unapproved SPT?

Answer 47

If the concerned director can show that they took all reasonable steps to ensure the company's compliance with S190 defence for a connected person: no knowledge of the circumstances

Question 48

When we talk about 'loans' to directors, what kind of transactions are caught by these provisions?

Answer 48

Loans - company lends money Quasi-loans Credit transaction Guarantees or securities - company stands guarantor, etc.

Question 49

When are companies 'associated' with one another?

Answer 49

When one is a subsidiary of the other, or both are subsidiaries of the same parent.

Question 50

Which companies must have permission to make loans, guarantees, or securities for directors? What form is permission in?

Answer 50

All companies - ordinary resolution.

Question 51

What type of companies will need approval for credit transactions, quasi loans, and loans to connected persons?

Answer 51

Public companies Private companies associated with public companies

Question 52

What is the definition of quasi loan?

Answer 52

A transaction under which the company agreed to pay a sum to a 3rd party on behalf of a director, on terms that the director will reimburse the company

Question 53

What is the definition of credit transaction?

Answer 53

Company provides goods or services in normal course of its business, to one of its directors, on basis that director will pay at a later date.

Question 54

What exceptional transactions will need no approval?

Answer 54

Spending on company business, up to £50,000 Loans for defending proceedings brought against a director, or defending regulatory actions or investigations Minor or business transactions - loans or quasi loans of up to £10,000, and credit transactions up to £15,000 Intra group transactions Money lending companies

Question 55

What rules are there regarding holding companies and wholly owned subsidiaries in terms of loans?

Answer 55

Transaction between holding company / person connected to director of holding company - members of holding company will also need to approve the transaction/ If a wholly owned subsidiary, no approval needed

Question 56

What defences are available to any loan transactions?

Answer 56

no liability if director took all reasonable steps to ensure compliance Defence for someone connected / director if they had no knowledge of the circumstances constituting contravention.

Question 57

What happens if a loan / similar transaction happens, and no approval has been obtained?

Answer 57

Arrangement is voidable at instance of company, unless - restitution no longer possible - company indemnified - rights acquired in good faith by a third party would be affected by the avoidance

Question 58

What procedure must be followed for a loan approval, and how is this procedure shortened?

Answer 58

Memo setting out proposed transaction must be made available for inspection by members of the company at company's RO for not less than 15 days, ending with date of the meeting / at the meeting itself Shortened using written resolution procedure.