Chapter 3: Directors

Question 1

Can a director be disqualified?

Answer 1

Yes for a period between two and fifteen years

Question 2

When a directorship ends, the director will often receive payment. Is an ordinary resolution needed to distribute funds?

Answer 2

Yes, if the amount payable exceeds £200

Question 3

What are the three main exceptions to the rule that shareholder approval is required to provide a loan to a director?

Answer 3

1. Expenditure on company business which enables the director to properly perform their duties up to a maximum of £50,000.
2. Expenditure on defending criminal, civil or regulatory proceedings.
3. Minor business transactions not exceeding £10,000

Question 4

What resolution(s) are/is needed to approve a loan to a director?

Answer 4

If the loan is from the company to its own director only (not a holding company director), then only 1 shareholders’ resolution is needed to approve.

If the company making the loan is holding company (subsidiary), and the director is also a director of the holding company, then 2 shareholders’ resolutions will be needed to approve:

(1) The company in question must approve the loan by ordinary resolution

(2) The holding company’s shareholders must also approve the loan by ordinary resolution.

Question 5

What resolution is required for a loan to be made to a director?

Answer 5

The company’s shareholders must approve the transaction by ordinary resolution

Question 6

What is the effect of making a breach in respect of a substantial property transaction?

Answer 6

The transaction is voidable and the responsible individual may be ordered to account to the company for the gain that they have made

Question 7

What are net assets?

Answer 7

Net assets are the value of a company’s total assets minus its total liabilities

Question 8

What is classed as a substantial property transaction?

Answer 8

A transaction is substantial if the asset is worth over £100,000; OR

More than 10% of the company’s net assets and over £5,000.

Question 9

Do loans fall within the remit of substantial property transactions?

Answer 9

No

Question 10

Are step-children classed as persons connected to a director?

Answer 10

Yes

Question 11

Are aunts/uncles, nieces/nephews classed as persons connected to a director?

Answer 11

No

Question 12

In the context of substantial property transactions, who is a person connected with the director?

Answer 12

A connected person is a member of the director’s family, business partners, and any company in which the director (alone or with others connected to them) holds at least 20% of the voting shares or shares

Question 13

How are substantial property transactions approved?

Answer 13

Shareholders must consent by way of ordinary resolution

Question 14

What is a substantial property transaction?

Answer 14

Where a director (or someone connected to them) buys from or sells to the company a non cash asset of substantial value

Question 15

What is the difference between fraudulent trading and misfeasance?

Answer 15

Fraudulent trading involves intentional dishonesty to defraud creditors, while misfeasance involves misuse of power or breach of duty by company officers, even without dishonesty

Question 16

What is misfeasance?

Answer 16

Misfeasance is when a director misuses their powers or handles company assets improperly, leading to harm or loss for the company

Question 17

What is fraudulent trading?

Answer 17

When the company’s business has been carried on with intent to defraud creditors

Question 18

There is a defence available to directors for wrongful trading. What is this defence?

Answer 18

If the director took every step with a view to minimising the potential loss to the company’s creditors. The standard expected of a director is assessed both objectively and subjectively

Question 19

In a claim against a director for wrongful trading, when may the court order a director to contribute towards the company’s assets? (3)

Answer 19

1. Company has gone into insolvent liquidation
2. Before commencement of winding up, director knew or ought to have known that there was no reasonable prospect that the company would avoid insolvent liquidation
3. That person was a director of the company at the time

Question 20

Can shareholders ratify a breach or potential breach? If so, how?

Answer 20

Shareholders can ratify a breach or potential breach of a director’s duty by ordinary resolution

Question 21

Is a board resolution authorising the breach or potential breach enough to protect the director in question from a claim for breach of duty?

Answer 21

Yes

Question 22

When assessing whether a director has breached its duty to promote the success of the company, what standard will they apply?

Answer 22

The court will apply a subjective test. This means that a director will not be in breach if they considered, in good faith, that their actions were most likely to promote the company’s success

Question 23

What is a company’s constitution?

Answer 23

Its articles of association

Question 24

Do directors owe a duty to company’s shareholders and/or creditors?

Answer 24

No, they owe a duty to the company

Question 25

What is special notice in relation to removal of a director?

Answer 25

If the shareholders wish to remove a director, they must give special notice. This means that the company must be given at least 28 clear days’ advance written notice before the meeting at which the special resolution is proposed

Question 26

What resolution is required to remove a director?

Answer 26

A director can be removed by an ordinary resolution of the shareholders. However, special notice is required

Question 27

Would ending a director's service contract automatically remove them from the office of director?

Answer 27

No, ending a director’s service contract does not automatically remove them from the office of director

Question 28

Does the act of dismissing a director end their service contract?

Answer 28

No, dismissing (removing) a director from office does not automatically end their service (employment) contract unless they are in repudiatory breach

Question 29

If a director resigns, what administrative step must they take?

Answer 29

If they are an individual, they must complete form TM01 or form TM02 if a company within **14 days** or resignation

Question 30

If a company entered into a service contract with a guaranteed term of more than two years without the approval of the shareholders, would the contract be void?

Answer 30

The contract is would not be void in its entirety — but it would be void to the extent that it provides for a guaranteed term longer than two years without shareholder approval. The service contract would be capable of termination with reasonable notice

Question 31

If a company only has two directors, would it be possible to approve a service contract for one of those two directors?

Answer 31

If the model articles have been adopted, no. The articles of association could be changed permanently by special resolution to allow directors to vote on matters they have an interest in. Alternatively, the shareholders could pass an ordinary resolution to temporarily suspend model articles in respect of director vote relating to service contract

Question 32

Would a ten-year service contract with a notice period of one year need authorisation by ordinary resolution?

Answer 32

No, a service contract of any length does not need shareholder approval if the company can terminate it on notice of two years or less

Question 33

If a company has the power under the terms of a service contract to terminate it with notice of two years or less, will it be considered a long-term contract?

Answer 33

No, the guaranteed term is the determining factor and not the length of the contract itself

Question 34

Who decides the terms of directors' service contracts?

Answer 34

The board sets directors' service contract terms, but shareholder approval is needed in the form of an ordinary resolution for contracts with a guaranteed term of more than 2 years as these are deemed long-term service contracts

Question 35

What is apparent authority and is it binding on company to the contract?

Answer 35

Apparent authority arises when a company, through its words or conduct, leads a third party to reasonably believe that an individual has authority to act on its behalf — even if they don’t have actual authority. If the third party relies on that belief, the company may be bound by the individual’s actions

Question 36

What are the two types of actual authority that a director may have to bind the company into contracts with third parties?

Answer 36

1. Express actual authority - director has consent from other directors to act in certain way e.g. may be set out in directors' service contract 2. Implied actual authority - director has acted in that way in the past and the board has not told them to stop or that they are acting in an unauthorised manner

Question 37

If directors and shareholders are the same people, is it acceptable for their roles to merge?

Answer 37

No, when at a board meeting must act as directors and promote the success of the company without thinking of their personal interests as a shareholder. When at a general (shareholders') meeting, they can act as shareholders and vote to promote their own interests

Question 38

What administrative steps must be taken once a new director has been appointed?

Answer 38

1. Notify Companies House within 14 days 2. Enter the director on its register of directors and register of directors' address

Question 39

How are directors appointed?

Answer 39

By ordinary resolution of the shareholders or by board resolution

Question 40

What is an alternative director?

Answer 40

A person who has been appointed to attend a board meeting if a director cannot attend

Question 41

What is the difference between de facto and shadow directors?

Answer 41

De Facto Director — Acts like a director and carries out the role of a director despite not being formally appointed Shadow Director — Exerts control from behind the scenes and have a great deal of influence over other directors despite not being formally appointed

Question 42

How is a chairperson appointed?

Answer 42

By passing a board resolution

Question 43

What is the difference between executive and non executive directors?

Answer 43

Executive directors are appointed to the board of directors and also have an employment contract with the company. Non executive directors are appointed to the board but do not have service agreements with the company - they do not receive a salary, just fees for attending board meetings

Question 44

What are directors' employment contracts also known as?

Answer 44

Service contracts or service agreements

Question 45

In which two ways can directors exercise their power?

Answer 45

1. Passing board resolutions at board meetings (majority) 2. Written resolution (agreement must be unanimous)

Question 46

What is the minimum age of a director?

Answer 46

16 years of age or older

Question 47

What is the minimum number of directors that a company must have?

Answer 47

Private companies must have at least one director whilst public companies must have at least two