Directors' duties and responsibilities

What is the first step when analysing a loan or related transaction involving a director?

Identify the type of company entering into the transaction.

What three company types should be distinguished when analysing loans and related transactions to directors?

A plc; a private company associated with a plc; and a private company not associated with a plc.

Which companies are subject to heavier restrictions on loans and related transactions to directors?

Plcs and private companies associated with a plc.

When is a private company associated with a plc because it is a subsidiary?

Where the plc controls more than 50% of the private company’s shares.

When can a private company be associated with a plc as a sister company?

Where both are subsidiaries of the same parent company, with the parent owning more than 50% of each.

What is the second step when analysing a loan or related transaction involving a director?

Identify the type of transaction.

What types of transactions must be considered in the rules on loans and related transactions to directors?

Loans, quasi-loans, credit transactions, and security or guarantees relating to them.

What is a quasi-loan to a director?

The company pays a director’s debt to a third party on the understanding that the director will reimburse the company.

What is a credit transaction with a director?

The company provides goods or services to the director on the basis that payment will be made later.

What is security in the context of a director’s loan?

A fixed or floating charge over a company asset securing a director’s loan with a bank.

What is a guarantee in the context of a director’s debt?

A promise by the company to repay if the director defaults on an existing debt obligation.

Which persons must be considered when analysing loans and related transactions to directors?

A director of the company or connected person, and a director of the company’s holding company or connected person.

What shareholder resolution is relevant to loans and related transactions to directors?

An ordinary resolution.

When does a private company with no plc association prima facie require shareholder approval?

For loans, or security/guarantees for loans, to a director of the company or its holding company.

When does a plc or private company associated with a plc prima facie require shareholder approval?

For all types of covered transactions involving directors and connected persons.

Which company must obtain shareholder approval where the transaction is with one of its own directors or a person connected with that director?

The company entering into the transaction.

Which companies must obtain shareholder approval where the transaction is with a director of the company’s holding company or a connected person?

Both the company entering into the transaction and the holding company.

What is the wholly-owned subsidiary exception to shareholder approval for director loans and related transactions?

Approval is not required from the members of a wholly-owned subsidiary.

What minor-transaction threshold applies to loans and quasi-loans to directors?

Up to and including £10,000.

What minor-transaction threshold applies to credit transactions with directors?

Up to and including £15,000.

What is the board’s legal relationship to the company?

The board acts as the company’s agent, not as agent of the shareholders: Howard Smith Ltd v Ampol Petroleum Ltd.

What is the board responsible for?

The day-to-day running and management of the company.

Where does the board’s managerial power derive from?

The company’s articles, e.g. Model Articles 3 and 5.

Can the board delegate decisions?

Yes, to a director or committee under MA 5.

What is the minimum number of directors for a private limited company?

One.

What is the minimum number of directors for a plc?

Two.

What natural-person requirement applies to company directors?

At least one director must be a natural person under s 155 CA 2006.

What minimum age applies to directors?

16 under s 157 CA 2006.

What does s 159A CA provide about disqualified directors?

A disqualified person cannot be appointed as director unless the court permits it.

Who are treated as persons connected with a director?

Primary family members; companies in which the director/connected persons hold 20%+; business partners and their connected persons; and trustees of trusts benefiting the director or connected persons.

What is an executive director?

A director appointed to executive office and involved in day-to-day management.

Is an executive director usually an employee?

Yes, usually under a service contract.

What is a non-executive director?

An officer who is not an employee and is not involved in daily management.

What is the role of a non-executive director?

Independent oversight and advice, including protection of shareholders’ interests.

What is a de jure director?

A director validly appointed at law.

What is a shadow director under s 251 CA 2006?

A person in accordance with whose directions or instructions the directors are accustomed to act.

Does merely giving professional advice make someone a shadow director?

No: s 251(2).

Which case illustrates that a disqualified person may still be a shadow director if controlling from behind the scenes?

Re Tasbian Ltd (No 3).

What must be shown to establish a shadow director under Re Hydrodam (Corby) Ltd?

Identify the de jure directors; show the alleged shadow director directed them; show they acted on those directions; and show they were accustomed to do so.

Can controlling shareholders or parent companies be shadow directors?

Yes, potentially.

What did Secretary of State v Deverell establish about “directions or instructions”?

They can include suggestions where the board has placed itself in a subservient role and surrendered discretion.

Is strong influence alone enough to establish shadow directorship?

No: Ultraframe (UK) Ltd v Fielding.

What additional element is needed beyond strong influence for shadow directorship?

A governing majority of the board must be accustomed to act on that person’s directions.

What is a de facto director?

Someone who acts as a director without valid appointment and participates in corporate governance/directorial decisions.

Which case is associated with identifying de facto directors?

Re Hydrodam (Corby) Ltd.

How are de facto directors treated for duties and liabilities?

Like de jure directors.

What did HMRC v Holland establish?

Acting as de jure director of one company does not automatically make that person a director of another company for which the first company acts as corporate director.

What practical distinction can be drawn between de facto and shadow directors?

De facto status focuses more on acting as a director towards third parties; shadow status concerns directing the actual board.

What is an alternate director?

Someone who acts in place of a director when that director is unavailable.

When are alternate directors permitted?

Only if the Articles allow them.

Are alternate directors provided for in the Model Articles?

No.

Who is usually appointed as an alternate director?

Another director or someone approved by the board.

What factors help identify whether someone is acting as a director?

Whether their acts are directorial, whether the company held them out as a director, and whether third parties viewed them as such: Smithton Ltd v Naggar.

How may directors be appointed under MA 17(1)?

By ordinary resolution of shareholders or by decision of the directors.

Which method of appointing directors is usually more common?

Appointment by directors.

What filing accompanies appointment of a director?

Form AP01.

Must a proposed director consent to act?

Yes.

Must companies now maintain internal registers of directors, PSCs or secretaries according to the notes?

No.

What changes concerning directors must be notified to the Registrar?

Appointments and changes to required director information using the relevant Companies House forms.

What director remuneration information must be disclosed under ss 412–413?

Salaries, bonuses and pension entitlements.

What other director-related payments must be disclosed under ss 412–413?

Compensation for loss of office and certain advances, credit and guarantees.

What is normally included in an executive director’s written service contract?

Duties, remuneration, notice and termination provisions.

Is a director automatically entitled to a service contract?

No.

Who determines a director’s terms and pay under MA 19?

The board.

What approval is normally sufficient for a director’s service contract?

A board resolution.

Where must director service contracts or memoranda of terms be kept?

At the registered office under s 228.

What form records removal of a director at Companies House?

TM01.

Can a director resign without board acceptance?

Yes: Glossop v Glossop.

When does vacation of office occur automatically under MA 18?

If the director becomes legally prohibited, bankrupt, makes a composition with creditors, is physically/mentally incapable for over 3 months, or is subject to an IVA.

How can shareholders remove a director?

By ordinary resolution under s 168 CA 2006.

What notice is required for a resolution to remove a director?

28 clear days’ special notice.

What right does the director have under s 169?

The right to be heard.

Can a director be removed under s 168 by written resolution?

No.

Can a director-shareholder vote on their own removal?

Yes.

What is a Bushell v Faith clause?

An Articles provision giving a director-shareholder weighted voting rights capable of blocking their removal.

What does s 1(1) CDDA 1986 prohibit a disqualified person from doing?

Acting as director or being involved in company management.

When is disqualification mandatory under s 6(1) CDDA 1986?

Where a company becomes insolvent and the director’s conduct makes them unfit.

What is the usual range of mandatory disqualification under s 6(1)?

2–15 years.

What type of conduct often supports mandatory disqualification?

Abuse of limited liability or disregard of creditors: Secretary of State v Blunt.

What are key discretionary grounds for director disqualification?

Criminal conviction connected with management; persistent filing defaults; fraud/wrongful trading; or public-interest grounds following investigation.

Which case is associated with public-interest disqualification following investigation?

Secretary of State v Pawson.

What happens if someone breaches a disqualification order?

It is a criminal offence and may also result in personal liability for company debts.

Can compensation orders be made for creditor losses caused by misconduct?

Yes, under ss 15A–15C CDDA 1986.

What is a disqualification undertaking?

A voluntary alternative to a court disqualification order under s 6(2).

Can competition-law breaches result in director disqualification?

Yes, for up to 15 years.

What retirement-by-rotation rule applies to public companies under the Model Articles?

Directors retire and seek reappointment every 3 years.

How often are listed-company directors generally subject to re-election?

Annually.

Do all types of director owe the same statutory duties?

Yes.

To whom are directors’ duties owed?

The company, not individual shareholders.

Whose interests may become relevant when the company is in financial difficulty?

Creditors.

What is the basic nature of a fiduciary duty?

A person in a position of trust must not improperly benefit from that position.

What is the duty under s 171 CA 2006?

To act within powers.

What two elements does s 171 require?

Act according to the constitution and use powers only for proper purposes.

How is proper purpose assessed?

Objectively: Extrasure Travel v Scattergood.

What example illustrates an improper collateral purpose?

Exercising a company power principally to secure a personal advantage unrelated to its proper purpose.

What did Hogg v Cramphorn establish?

Issuing shares to defeat a takeover can breach s 171.

Can directors ever resist a takeover consistently with s 171?

Yes, if genuinely protecting the company: Teck Corp v Millar.

What did Howard Smith v Ampol establish about share issues?

Issuing shares to destroy an existing majority rather than raise capital is an improper purpose.

What did Eclairs Group v JKX Oil & Gas establish?

Using powers to manipulate voting outcomes can breach s 171.

What principle comes from Re Smith & Fawcett Ltd in relation to directors’ powers?

Directors must act bona fide in what they consider to be the company’s interests, within the limits of their powers.