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BUSINESS LAW AND PRACTICE (KNOWLEDGE)
Unit 8 Guide Directors’ duties and Directors’ transactions
Context
This Unit considers the duties of directors and ways in which they are restricted in their dealings with companies under the Companies Act 2006.
The duties are mostly based upon the duties of loyalty owed by a fiduciary and are owed by directors to the company itself.
A number of the statutory provisions are concerned with the issue of the conflict of interest a director may face between the interests of the company and their own personal interest (or the interest of some other person close to them). Where transactions take place between a company and one of its directors, the law may require the transaction to be approved by the members of the company. In this way, the directors are prevented from entering into transactions in which one or more of their number may have an interest without the informed consent of shareholders.
Lawyers may be required to advise companies or their directors where there has been a breach of duty, but they are as often required to provide guidance and advice to officers of a client company to ensure that such breaches do not occur. In this Unit, you will consider a range of circumstances which potentially give rise to breaches of duty, the mechanisms by which breaches of duty may be avoided, and related issues of company procedure. You will also consider circumstances which give rise to a conflict of interest and the mechanisms used to avoid procedural errors.
Outcomes
By the end of this Unit you should be able to:
1. Explain the legal framework of responsibilities which apply to company directors
and determine whether directors may be in breach of their duties. 2. Analyse circumstances in which directors must make declarations of interest and the procedural consequences of directors’ interests. 3. Identify and analyse transactions with directors which require the approval of members.
Analyse circumstances in which directors must make declarations of interest
and determine the procedural consequences of directors’ interests. Analyse transactions between a company and its directors to determine whether the approval of members is required. Analyse a range of circumstances in order to identify whether directors are at risk of breaching duties arising under Companies Act 2006.
Preparation
To prepare for this Unit Workshop you should:
1. Read or re-read the following chapters of the Business Law and Practice textbook: Chapter 5, paragraph 5.8.6 Chapter 6, paragraph 6.5 - 6.8 Chapter 7, paragraphs 7.1 - 7.12
2. Read sections 170-177, 182, 183, 188, 190, 191, 197, 204-207, 252-254 and 1163 of CA 2006. 3. Read the i-tutorials ‘Directors’ Duties’ and ‘Directors’ Transactions’. 4. Review your notes from the Business Accounts Unit, in particular in relation to the structure and purpose of a Balance Sheet. 5. Complete Test and Feedback Unit 8 (Preparation). 6. Carry out the Preparatory Task below.
Materials required for the Unit Workshop
1. This Guide. 2. Your notes from the Preparatory Task. 3. Your Business Law and Practice textbook. 4. Your Business and Company Legislation Handbook.
Consolidation
It is important that you consolidate your learning.
In particular you should:
1. Review the Unit Workshop Tasks. 2. Complete Test and Feedback Unit 8 (Consolidation). 3. Complete the Consolidation Task below.
Your firm has been instructed by Constance Jeffries.
Read the following e-mail from your supervising partner, Nicola Simms, and then address points 1-4 of her email, overleaf.
Tip: There are two ways of approaching your explanation of which duties each director has breached: the first approach is to go through the duties one by one and explain how they might apply to one or more of the directors, and the second approach is to take each director in turn and explain which duties they might have breached. Please adopt the first approach, which will be easier and quicker.
From: Nicola Simms
To: [You] Date: [Date of Workshop] Client: Constance Jeffries Matter: Industrial Alkalis Limited – purchase of Dudson business.
I have had a phone call from Constance Jeffries, a shareholder in Industrial Alkalis Limited (“Alkalis”). Alkalis manufactures bleaches and other caustic products for use in industry. (She used to be on the board of Alkalis until she left the company ten years ago.)
Constance has recently been made aware that Alkalis has purchased a bleach and caustic products bottling plant on the outskirts of Leeds for £5.2 million from Dudson Packaging Limited (‘Dudson’). She has some major concerns about the purchase and is seeking our advice on the possibility that the directors involved have breached their duty to Alkalis.
Apparently, the reason for the purchase is that Alkalis needed to offer a wider service than just bulk chemicals, hence the desire to expand into bottling. The plant will also allow for opportunities to bottle and market Alkalis’ own products to a wider customer base. (Alkalis’ board has plans to extend the bottling plant site and increase its output.)
Constance has told David Sellick, the managing director of Alkalis, that she believes the purchase to be foolish. In particular, she feels that the Alkalis’ board failed to carry out sufficient due diligence on whether the purchase would be a good idea and that it has panicked into paying over the odds for the plant. In particular, to save on fees, the board agreed to Christa Sealy leading the due diligence exercise. Christa is the finance director and is a qualified accountant. The other directors do not have such expertise.
Constance understands that Alkalis borrowed around 80% of the purchase price; the balance coming from Alkalis’ reserves. Alkalis already operated with an overdraft of
£500,000 and there is a loan outstanding of £1,250,000. Constance is worried that this additional debt may become too much for Alkalis to service. She is also deeply concerned about the environmental impact of the bottling plant (which is alleged to have a poor track record of preventing chemical leaks into a nearby river, resulting in Dudson being the subject of a criminal prosecution by the Environment Agency). Constance also mentioned that she had been told that David had been given frequent use of Dudson’s corporate hospitality boxes at various major sporting venues in the lead up to the purchase.
Finally, Constance has heard that when Christa had been carrying out the due diligence on Dudson, she had discussed with Dudson’s directors the possibility that, once the purchase had gone ahead, Alkalis would be able to expand into pressure- filling for high-viscosity liquids – something which Dudson had received requests from customers to do, but the plant had not been available to deliver on. Christa discussed this possibility with the Alkalis board and following a decision not to proceed with further expansion, Christa gained board approval to use Dudson’s contacts to set up her own plant to provide a pressure-filling service. I rang up Companies House and ordered a company search to have the full details of Alkalis, which I have summarised this morning in the table attached, to help you on your way.
I am meeting with Constance next week and need you to report on the following: 1. Based on the information provided I need to know whether or not any of the directors of Alkalis has breached any duty under CA 2006 in relation to the purchase of the bottling plant. 2. On the basis that there have been breaches, briefly explain what remedies may be available, and to whom. 3. Explain the extent to which s239 CA 2006 could thwart any remedy. 4. As always, please list whether we need any further information to advise fully.
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26,000 ordinary shares of £1 each, fully paid up
Christa Sealy 26,000 ordinary shares of £1 each, fully paid up
Parimal Shahani 12,000 ordinary shares of £1 each, fully paid up
Constance Jeffries 6,000 ordinary shares of £1 each, fully paid up
Rose Mahengi 6,000 ordinary shares of £1 each, fully paid up
Hemlington Catalyst Investments
24,000 “A” ordinary shares of £1 each, fully paid up
Directors: David Sellick Managing Director
Christa Sealy Finance Director Bertrand Smith Non-executive director Stephanie Gibson “A” director
Company Secretary: Christa Sealy
Registered Office Address: Reaction House Bunsen Street Leeds LS2 3AB
Articles of Association: Model Articles of Association amended by creation of
class of “A” ordinary shares, carrying right to appoint an “A” director, preferential rights on a return of capital on winding up, and requiring consent of a 75% majority of the “A” ordinary shareholders on a range of matters.
Mortgages and Charges: First fixed and floating charges securing all monies from time to time owed to the Teesside Bank PLC.
In order to widen your general awareness of the role of directors in a commercial
organisation and the place of directors’ duties in the wider context of corporate governance and a company’s activities:
1. Access the ICAEW website at https://www.icaew.com/library/subject-
gateways/law/company-law/directors-duties and click on ‘ICAEW’s guide to directors’ duties and responsibilities’ (which you will find under the ‘Need to know’ heading). There you will find 9 sections dealing with different aspects of directors’ responsibilities, which you should browse.
2. Browse the “Governance Framework” page of the Marks and Spencer Group plc website.
3. Locate and review a law firm publication on directors’ duties.
This Task concerns AXBC Ltd (‘AX’). AX has the Model Articles of Association without amendment.
The directors and shareholders of AX are as follows:
Name Directorship Shareholding
Haleema Khan Yes and Managing Director 14,800 ordinary £1 shares and Chair Rezana Begum Yes and Company Secretary 6,400 ordinary £1 shares Safina Masud Yes 14,800 ordinary £1 shares Chris Collins Yes None Akhbar Rahman Yes 4,000 ordinary £1 shares
Assume you are a trainee in the corporate department of ULaws Solicitors LLP, 15- 16 Park Row, Leeds, LS1 5HD. Your supervising solicitor, Christine Linford, has received an email with instructions from Haleema Khan, the Managing Director of AX.
a. Read the extract (below) from the email from Haleema. Then read the balance sheet and identify any shareholders’ resolutions necessary to achieve the client’s four objectives. You do not need to plan the procedure the board would need to follow in order to pass the resolutions.
b. If AX were to go ahead with its proposals, would any declarations be
necessary under sections 177 and 182 Companies Act 2006?
To: Christine Linford Christine.Linford@ulawllp.co.uk
Thanks for the work you recently undertook for us.
I hope to call a board meeting in the not too distant future with a view to gaining approval in connection with the matters listed below. Could you confirm the procedure AX needs to follow so that the necessary notices can be given? Please advise on the basis that all directors are in favour of the proposals.
1. Arrange for AX to lend £55,000 to Safina Masud. Safina has requested the money for personal reasons (her husband has recently been diagnosed with multiple sclerosis and she wishes to make appropriate alterations to the family home to aid his independence). 2. Purchase new warehouse premises for £110,000 from me. I inherited them from my father on his death last year and I have no use for them. The address of the property is 27 Ledbetter Road, Bridlington, Oxfordshire OX23 2RU. 3. Enter into a contract with Universal Cabling Limited (‘UCL’) for the supply of £84,000 worth of cabling. Safina Masud has a 5% shareholding in UCL and her husband has a 20% shareholding. 4. Award Akhbar Rahman a new fixed-term service contract of three years with no notice period.
