SQE 1 - BLP - Directors' duties and responsibilities

What kind of resolution is needed to amend the articles (s21 CA)?

special resolution

What kind of resolution is needed to remove a director (s168)?

ordinary resolution

To whom do directors owe their fiduciary duties?

The company

(apart from on insolvency - where the directors owe duties to the creditors

What is a de jure director? What is a de facto director?

- de jure director validly appointed at law

- de facto director is someone who assumes to act as a director but has in fact not been validly appointed

- will not be bound by fiduciary duties and liabilities

How many directors must public and private companies have?

private limited company = at least one director

public limited company = at least two directors

- no maximum amount unless specified in articles

- at least one director must be a natural person

Minimum age for directors (s157)

16 (/appointment not valid until age 16)

Who is not able to act under a director from 4 March 2024 (s159A)?

a person cannot act as director if they were disqualified under director disqualification legislation, unless they have permission of the court

What is a shadow director?

- 'a person in accordance with whose directions or instructions the directors of the company are accustomed to act' (CA 2006)

- would not include accountant giving professional advice e.g.

How are de facto directors and shadow directors restricted by CA 2006?

- still subject to same duties and restrictions as de jure directors

What is an executive director?

What is a non-executive director?

exec = director who has been appointed to executive office, usually also an employee e.g., finance director

non-exec = an officer of the company but will not be an employee of the company, provides independent guidance

What are alternate directors?

- will take the place of a director where one or more directors are absent

- has the voting powers of the absent director

- may be a fellow D themselves, or someone approved by the board

- not something included in MA, use is now quite rare, but generally thought that they are bound by same rules as other Ds

What are the duties of the company secretary?

- keep the company books up-to-date

- produce minutes of board and general meetings

- make sure that all necessary filings are made at Companies House

Not involved in decision-making

What types of company must have a company secretary? What happens in a company that does not have a company secretary?

A public company must have a company secretary

A private company is not required to have a company secretary, unless the articles require it to have one

If a private company does not have a company secretary, the directors (or any person the directors authorise) may do anything the secretary was required to do

Who can act as company secretary?

- A public company secretary must have the requisite knowledge and experience, and one of the qualifications set out in s273(2) (eg. solicitor or chartered accountant)

- Appointed by directors, who must check that the secretary qualifies

How are directors appointed?

Companies with MA may appoint a director:

- By an ordinary resolution of the shareholders

- OR by a decision of the directors (most common)

- dealt with in MA, not by CA

Form on which directors consent to their appointment as such

AP01

What are the general rules around normal service contracts?

- terms of a director's service contract (employment contract) are generally decided by the board

- no automatic entitlement to payment

- s228 - company must keep copies of directors' service contracts/memoranda of terms at their registered office

- shareholders have a right to inspect copies of directors' service contracts or memoranda, which must be provided within 7 days of request

What must companies disclose re their directors?

must notify the Registrar of Companies (ie Companies House) of changes relating to its directors or secretary using Form AP01

- (no need to have a register of directors and secretaries at its registered office since Nov 2025)

- directors' salaries, bonuses and pension entitlements + compensation paid to past directors for loss of office must be filed alongside annual accounts

- payments to a person conected to the director/a company controlled by a director

- advances and credits given by a company to its directors

What must companies disclose re their company secretary?

· must notify the Registrar of Companies of changes relating to its company secretary using Form AP03

- Companies must notify Companies House if any "required information" about a company secretary changes (ss279H, 279J and s279K).

What details must the register of directors include?

What details must the register of secretaries include?

(a) name and any former name

(b) a service address (business or residential)

(c) the country or state in which he is usually resident;

(d) nationality;

(e) business occupation (if any);

(f) date of birth.

Company Secretary = name and former name + address

Form filed at Companies House when a director leaves office

TM01

How can a director be removed before expiration of their period of office?

- by ordinary resolution of shareholders

- must give 28 days' special notice

- board cannot remove a director unless stated in the articles

What procedural steps must be followed where the ordinary resolution to remove a director is to be passed at a General Meeting?

Memorandum setting out the resolution must be:

a) Circulated among members at company's office at least 15 days before the meeting; and

b) Available at the meeting itself.

Is it possible to hold a GM to remove a director on short notice? Is it possible to hold a GM to remove a director using written resolution procedure?

Yes - but the memorandum still needs to be circulated for 15 days - therefore short notice procedure only saves 1 day

o Normal notice = 14 clear days'- ie. 16 days later

o Short notice + circulation of memorandum = 15 days

Written resolution procedure can be used

What are the other ways that a director can leave office?

Automatic termination --- if disqualified, declared bankrupt, incapable of acting for more than 3 months, subject to individual voluntary arrangement

Resignation by notice

What does the Company Directors Disqualification Act 1986 state about disqualification of directors? What are the grounds?

- court may make a disqualification order preventing a person from being a director, liquidator, receiver or in any other way involved in the promotion, formation or management of a company, unless they obtain leave of the court

- Grounds for disqualification: fraudulent or wrongful trading or persistent breaches of company law

What is meant by retirement by rotation?

- MA for public companies require retirement and reappointment of directors by the members every three years

- All directors of listed companies are subject to annual re-election.

Directors' duties ss171-177

s171. Duty to act within POWERS

s172. Duty to promote the SUCCESS of the company for the benefit of the members as a whole

s173. Duty to exercise independent JUDGMENT

s174. Duty to exercise REASONABLE care, skill and diligence

s175. Duty to avoid CONFLICTS of interest

s176. Duty not to accept BENEFITS from third parties

s177. Duty to declare any INTEREST in a proposed transaction

What is included in the duty to act within powers? (s.171)

- duty to act within company's constitution (must not breach articles)

- duty to exercise powers for the purposes for which they are conferred (must not use them for personal gain)

What is included in the duty to promote the success of the company? (s.172)

A director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

success = long term increase in value

What factors must a director take into account when deciding how to promote the success of the company?

- employees' interests

- need to foster relationships with suppliers, customers and others

- impact of the company's operations on the community and the environment

- desirability of the company's maintaining a reputation for high standards of business conduct

- need to act fairly as between the members of a company

KEY POINT: factors on the list are secondary to overall duty to shareholders (D must do whatever is "most likely to promote the success of the company for the benefit of its members as a whole.")

What is included in the duty to exercise independent judgment?

directors must exercise their powers independently, and make their own judgments

Must not fetter the future exercise of their discretion

Duty will not be breached where:

- D is acting in accordance with an agreement entered into by the company that restricts the future exercise of discreation by its directors

- D is acting in a way authorised by constitution

What is included within the duty to exercise reasonable care, skill and diligence?

required level is the level of skill, care and diligence which would be exercised by a reasonably diligent person with:

- the general knowledge, skill and experience that may reasonably be expected of someone in their role; and

- the general knowledge, skill and experience of that director.

Minimum standard expected of a director is that objectively expected of a director in that position

- Standard may then be subjectively raised if the particular director has any special knowledge, skill and experience.

What is included within duty to avoid conflicts of interest? (s.175)

director must 'avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.'

wide definition, applies 'in particular to the exploitation of any property, information or opportunity', even if the company could not have used the opportunity itself!

When is conflict of interest allowed under s.175?

if the conflict arises:

- in relation to a transaction with the company (eg a transaction between the director and the company)

- in relation to a matter which has been authorised by the directors (i.e., can be an obvious conflict, but acceptable if authorised by board

What is included within the duty not to accept benefits from third parties? (s. 176)

D must not accept a benefit from T conferred just because they are a director, or because they do or refrain from doing something as a director

- D cannot get authorisation from the board in order to get around this (as they can for s.175)

- however, there will be no breach if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest

What is included within the duty to declare an interest in a proposed transaction? (s. 177)

- must declare nature and extent of involvement in proposed or existing transactions with the company

- applies to direct (D is the other party) and indirect interests (e.g., spouse owns the company; or D is a member of the other company)

- known as indirect interests, not connected persons

What are the rules around the method of declaring an interest in a transaction under s.177?

- must declare interest before transaction is entered into

- can make this declaration at a Board Meeting or in writing in advance

- if in writing, must be sent to all Ds either electronically or on paper

- can give a general notice stating they are always to be considered an interested party in transactions with X

When does D not need to make a declaration of an interest in a proposed transaction under s. 177? (ie. exceptions)

- D is not aware of their interest or of the transaction/arrangement (will be treated as aware if they reasonably ought to have been)

- or if the interest cannot reasonably be regarded as likely to give rise to conflict of interest/the other Ds ought to have known about the conflict of interest

- conflict arises due to service contract, which was considered by the board

What is the effect of having a declared interest in a transaction (per MA 14(1)) re voting?

cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement.

How can a director involved in a transaction still vote in a BM?

- if the company disapplies MA 14(1) each time the conflict arises by ordinary resolution;

- or the director's interest cannot reasonably be regarded as likely to give rise to a conflict of interest

- or the director's conflict arises from a permitted cause (defined in MA 14(4)).

- or amend articles allowing an interested D to vote

Who can claim remedies against D for breaching their duty?

- company (not shareholders) has claim against D

What is the remedy for breach of the duty of care, skill and diligence (s 174)?

Damages

What is the remedy for all breaches of duty (except failure to show reasonable care, skill and diligence)?

- injunction

- setting aside of the transaction

- restitution and account of profits

- restoration of company property

-damages.

Can shareholders approve of breaches in advance of the breach by D?

- shareholders can approve in advance something that would otherwise be a breach

- (does not apply to illegal acts)

- only applicable where there has been full disclosure by D

Can shareholders approve of breaches after the breach by D occurs?

- can ratify the breach by ordinary resolution if the breach was negligence, default (failure to pay), breach of duty or breach of trust.

- HOWEVER, if D is a shareholder, they cannot use their voting share, or shares held by someone connected to them, to ratify the breach

- illegal acts can never be ratified.

· Shareholders cannot ratify a director's breach of fiduciary duty in insolvency situations since directors owe their duties to creditors

What is required before giving a director a service contract with a guaranteed term of more than 2 years?

approval from shareholders by ordinary resolution

What is the guaranteed term (for service contracts)?

1. the period that the contract is for, during which the company cannot terminate the contract or can only terminate in certain limited circumstances

2. the period of notice to be given by the company to the director

3. The aggregate of any periods covered above

What happens if the provision in the long term service contract stating the guaranteed term has not been approved by the shareholders under s.188 CA?

- the provision stating the length of the term will be void

- an implied term is added to the contract entitling the company to terminate the contract at any time by giving reasonable notice

When is approval not required for long-term service contracts?

- approval is not required from members of Company A if A is wholly owned by Company B

- and nor will they need approval from members of Company B

Is it necessary for Ds to disclose interests within a service contract?

- not required (s177 CA)

- but they tend to do so anyway so that it is recorded in the board minutes

Can D vote/count in the quorum for board resolutions regarding their contract?

No (MA 14(1))

Where and for how long must service contracts be held by the company?

- must be kept at registered office or another place

- for at least 1 year from date of termination/expiry of contract

members have right to inspect this without charge

What must be issued at the general meeting when the service contract is to be voted on by members?

- memorandum setting out the proposed contract must be made available for inspection by members of the company

- at the company's office for not less than 15 days ending with the date of the meeting itself

- AND at the meeting itself

How much notice must be given of a GM when a service contract is to be voted on in the meeting?

(also consider for short notice procedure and written resolutions)

at least 15 days' notice so that shareholders can review the contract

- even if short notice procedure is followed!

- UNLESS a written resolution is used rather than a GM - if so, memorandum containing the contract must be sent to every eligible member before or at the time the written resolution is submitted

What type of approval is required for acquisition or disposal to a director (or holding company director, or connected person) of a substantial non-cash asset?

Ordinary resolution by the shareholders

When must shareholder approval be given for acquisition/disposal of a substantial non-cash asset to director or connected person?

- before the transaction

- OR afterwards, as long as the transactions is made conditional on approval of being obtained

What is classed as a substantial non-cash asset?

- asset that is worth over £5,000 and equates to more than 10% of the company's net asset value

- OR asset worth over £100,000 (no relation to net asset value)

What is net asset value for new companies that have not filed accounts?

net asset value is taken to be the amount of the company's called up share capital.

Who is a person connected with a director for the purpose of disposing of/acquiring substantial assets? (family)

- spouse or civil partner, parents, children or step-children

- a company of which one of the above person owns more than 25%

Does NOT include: brothers, sisters, grandparents, grandchildren, uncles and aunts

Who is a person connected with a director for the purpose of disposing of/acquiring substantial assets? (business)

- companies in which D/others connected with them holds 20% or more of the shares

- business partner of D

- business partner of those connected to D

- trustees of a trust of which D or those connected to D are beneficiaries

What type of approval is needed for a transaction between a company (C) and the director of C's holding company/person connected to them?

(which shareholders will need to approve?)

Holding company shareholders will need to approve the transaction via ordinary resolution

When is shareholder approval not required for aquiring/disposing of substantial non-cash assets?

not required by the members of any company which is a wholly-owned subsidiary of another company

ALSO not required for transactions

- between the company and its shareholders

- between holding company and its subsidiary

- between two subsidiaries of the same company

Will a substantial non-cash transaction entered into without approval be valid?

transaction will be VOIDABLE UNLESS:

- restitution is no longer possible

- or the company has been indemnified for the loss or damage suffered by it

- or it would affect rights acquired in good faith by third parties

- or if the arrangement has been affirmed by shareholders (or holding company if relevant) by OR in a reasonable period

How will directors/those connected with them be punished for entering into a substantial non-cash transaction without approval?

- liable to account to the company for any profits made

- must also indemnify company for any loss incurred

What are the 2 defences to unapproved transactions with a substantial non-cash asset?

- if transaction is between company and person connected with director, D will not be liable if they show they took all reasonable steps to ensure the company's compliance

- if D or the connected person can show they had no knowledge of the circumstances constituting the contravention.

if a loan is between a company and its holding company, is approval needed from members of the company?

approval is needed from BOTH sets of members

can D vote on a resolution regarding a company they have an interest in/run by a connected person?

No

What level of resolution is required for shareholder approval of loans to directors?

ordinary resolution

What is a quasi-loan?

where a company agreed to pay off an outstanding account owed by a director to a third party on the understanding that the director would later reimburse the company

- different to a credit transaction as it is a transaction with a third party

What is a credit transaction?

any transaction entered into between the company and the director where the company provides goods or services on a credit basis which will be paid for at a later date

- unlike a quasi-loan as only the company and its directors are parties to the arrangement

What does it mean when the company guarantees/provides security for a loan of the director's?

where a director obtains a loan from a bank and their company stands as guarantor for the repayment of the loan or the company provides the bank with security over its assets

Which companies are restricted when making loans to directors?

all companies

- no company can make loans to directors or give guarantees without shareholder approval via ordinary resolution

- applies to private and public companies

Which companies are subject to additional limits of making loans to directors etc.?

- public companies

- private companies that are associated with public companies (if one is a subsidiary of the other or both are subsidiaries of the same body corporate)

(must have some link to a public company)

What are the additional limits on public companies and private companies associated with public companies re loans?

Require shareholder approval for:

- loans to a person connected to a director of the company, or a director of its holding company

- quasi-loans to their directors, directors of a holding company, or persons connected with such directors

- credit transactions with their directors, directors of a holding company, or persons connected with such directors

- guarantees or security in respect of any such loans above.

What kinds of loans will not require shareholder approval?

- Expenditure on company business (up to a maximum of £50,000)

- Loans for defending proceedings brought against a director

- Loans for defending regulatory actions or investigations

- Minor and business transactions - loans or quasi-loans of up to £10,000 and credit transactions up to £15,000

- Intra-group transactions

- loans made by money lending companies (where the loan is made in the ordinary course of the business of the company).

What will happen if shareholder approval is not obtained for a loan?

the arrangement is voidable at the instance of the company

unless:

(a) restitution is no longer possible

(b) the company has been indemnified for the loss or damage suffered by it, or

(c) rights acquired in good faith by a third party would be affected by the avoidance.

What will happen to the directors involved if shareholder approval is not obtained for a loan?

- the directors involved are liable to account to the company for any profits made and to indemnify the company for any loss incurred

Can an unauthorised loan be affirmed by the shareholders?

- can affirmed by the shareholders of the company and the holding company (where relevant)

- via ordinary resolution within a reasonable period.

- If it is affirmed, the arrangement may no longer be avoided

What are defences to an unauthorised loan etc?

- director will not be liable for the unauthorised loan etc. if they took all reasonable steps to ensure the company complied with CA 2006

- also a defence for any director (or connected person) that authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.

What approval will be needed from the holding company for a loan?

if the transaction is between a company and a director of the company's holding company or a person connected to a director of the holding company...

...the holding company will also need to approve the transaction by OR.

What is the rule around approval of loans for wholly-owned subsidiaries?

- approval is not required by the members of any company which is a wholly-owned subsidiary of another company

What does the director need to disclose to the board when they have an interest in a loan?

- director would need to disclose the nature and extent of their interest to the board if they were interested in any of the transactions

- possible that D will not need to declare an interest if the other directors are already aware, however best practice to declare so that it is in the board minutes

Can interested directors vote on the board resolutions to approve the loan transaction?

- not permitted to vote

- cannot count in the quorum

What is the procedure for passing an OR at a GM to approve the loan?

- a memorandum setting out the proposed transaction must be made available for inspection by members of the company both:

- at the company's registered office for not less than 15 days ending with the date of the meeting; and

- and at the meeting itself.

- A minimum of 15 days' notice of the general meeting held to approve the transaction will therefore have to be given to shareholders (even if the short notice procedure is followed)

What is the procedure for passing a written resolution at a GM to approve the loan?

- a memorandum setting out the proposed transaction must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.