Director's Duties, Long Term Service Contracts, Substantial Property And - Business Law and Practice

Director's duties 1) General duties Duty to act within powers - s.171 CA 2006 Duty to promote the success of the company - s.172 CA May be in breach and have to apply this for transactions with the company Duty to exercise independent judgment - s.173 CA 2006 Duty to exercise reasonable care, skill and diligence - s.174 Duty to avoid conflicts of interest - s.175 CA 2006 Does not apply to transactions with the company - s.175(3) * S.175 - There does not apply to long-term service contracts, substantial property transactions or loans to directors / connected persons Duty not to accept benefit from third parties - s.176 CA 2006 Duty to declare interest in proposed transaction or arrangement - s.177 CA 2006 Will apply to transactions with the company - s.177(1) Declaration must be before the company enters into the transaction - s.177(4) There are limited exceptions, where a director will not have to declare his interest - s.177(6) * However in practice, despite these exceptions, it will be prudent and common to declare the interest anyway 2) Specific duties / restrictions Approval for long-term service contracts - s.188-s.189 1) Is the contract longer than 2 years? -s.188(1)(a) and (b) CA This is 2 year 'guaranteed term' applies either to the following instances, either on their own or as an amalgam of the two: s.188(3)(a) The period during which the director's employment: s.188(3)(a)(i) Is to continue or may be continued otherwise than at the instance of the company (under the original agreement or a new agreement in pursuance of it) - where only the director can decide whether to renew / terminate AND s.188(3)(a)(ii) Cannot be terminated by the company by notice, or terminated only in specified circumstances Yes s.188(3)(b) If the period of notice given by the company for termination is over the 'guaranteed term' 2) What procedure must be followed? A memorandum setting out the proposed contract is made available to members: s.188(5) CA Written resolution - s.188(5)(a) CA It is sent to every eligible member at or before the time at which the written resolution is sent to him. Resolution at a meeting - s.188(5)(b)(i) and (ii) CA It is made available for inspection at the company's office not less than 15 days before the meeting and at the meeting itself. 3) Is shareholder approval needed? 4) What are the consequences if the service contract has been granted but approval has not been obtained? 1) Approval is required from the company itself The company of which he is director of has to approve it by ordinary resolution - s.188(1)(a) and 188(2)(a) CA 2) Approval is also required from a parent company if: The director is director of the holding company, a resolution of the members of the holding company have to approve it by ordinary resolution - s.188(1)(b) and s.18(2) (b) 1) The provision is void, to the extent of the contravention AND S.189(a) * The two years of contract is valid, but everything over is void 2) The contract is deemed to contain a term entitling the company to terminate the contract at reasonable notice. S.189(b) * This applies to the part over 2 years 5) Are there any defences / exemptions that apply? 1) Non-UK company or wholly owned subsidiary s.188(6) No approval from a company's members is required under s.188 if the body corporate: s.188(6)(a) Is not a UK-registered company s.188(6)(b) is a wholly owned subsidiary of another body corporate Approval for substantial property transactions s.190- s.196 * Applies to director of connected persons acquiring a non-cash asset from the company OR * The company acquiring a non-cash asset from a director or a connected person 1) Is the company transacting with a director of the company or a connected person? Director * Director at time of transacting - Check company website or at Companies House Director of holding company Connected persons Includes Member's of the director's family s.252(2)(a) * Defined in s.253 Director's spouse or civil partner - s.253(2)(a) A person with whom the director lives as partner in a relationship s.253(2)(b) Director's children or step children s.253(2)(c) Children living with the director under b) who are under 18 s.253(2)(d) The director's parents s.253(2)(e) A body corporate with which the director is connected - s.252(2)(b) * Defined in s.254 A person in his capacity as trustee of a trust s.252(2)(c) * Defined in s252(2)(c)(i) and (ii) A person acting in his capacity as partner of the director or partner of connected persons under sections a) b) or c) - s.252(2)(d) A firm that is a legal person under law and contains circumstances listed s.252(2)(e) * Defined in s.252(2)(e)(i) - (iii) Does not include Other directors of the same company as the director transacting s.252(3) A director's sister - s.253 The director, and the connected persons are interested in 20% of the nominal share value of the body corporate s.254(2)(a) The director, and the connected persons are entitled to exercise more than 20% of the voting power at a general meeting of the body corporate - s.254(2)(b) 2) Is it a non-cash asset? Any property or interest in property other than cash s.1163 CA 3) Is the non-cash asset substantial? Judged at the time the arrangement is entered into s.191(5) Substantial An asset worth more than PS100,000 s.191(2)(b) An asset worth more than 10% of the company's: s.191(2)(a) Net assets if there are recent statutory accounts s.191(3)(a) Called-up share capital if there a no recent statutory accounts s.191(3)(b) Not substantial 4) Is shareholder approval needed? 5) What are the consequences if the transaction has occurred but approval has not been obtained? An asset worth less than PS5,000 s.191(2)(a) a) Approval is required from the company itself if 1) 2) and 3) are satisfied 1) Has to be approved by an ordinary resolution of the company s.190(1) b) Approval is also required from a parent company if: 2) The director or connected person is director of the company's holding company, or connected to such a person, the holding company must also pass a resolution - s.190(2) The transaction is voidable unless: s.195(2) Restitution of any money or asset that was subject to the agreement is no longer possible s.195(2)(a) The company has been indemnified by any other person for the loss suffered s.195(2)(b) The rights of a third party acquired in good faith, for value, without actual notice of the contravention, would be affected by the avoidance s.195(2)(c) The transaction is affirmed by the ordinary resolution of the shareholders of the company (for a s.190(1) breach) or by ordinary resolution of the shareholders of the holding company (for a s.190(2) breach) - s.196 The liability for the transaction rests with the director themselves, any authorising directors and the connected person to account for any gain or indemnify for the loss. s.195(3) and (4)