ICAEW BL · Chapter 10

Directors, members and company meetings MCQs with Answers

10 multiple-choice questions on Directors, members and company meetings for ICAEW BL Business Law. Try each one before revealing the answer and explanation.

1. Question 1

   The members of Carrick Ltd, a private company, want to remove director Owen before his term ends. At a general meeting called on 14 days' notice, they pass an ordinary resolution removing him. No special notice of the resolution was given to the company, and Owen was not sent a copy of it or given any chance to make representations. Is the removal valid?

   • A) Yes, because a majority of the members voted for the removal
   • B) Yes, provided the board later confirms the removal
   • C) No, because removal of a director requires a special resolution
   • D) No, because a resolution to remove a director under s168 requires special notice, which also triggers the director's right to be heard
   Show answer & explanation

   Answer: D) No, because a resolution to remove a director under s168 requires special notice, which also triggers the director's right to be heard

   Under s168 Companies Act 2006, members may remove a director by ordinary resolution at a meeting, notwithstanding anything in the articles. However, special notice of the resolution is required (s168(2)). Special notice means the company must be given notice of the intention to move the resolution at least 28 days before the meeting (s312), and the director is then entitled to a copy, to be heard at the meeting and to have written representations circulated (s169). These steps were not taken, so the removal is invalid. A special resolution is not needed, and board confirmation cannot cure the defect.

2. Question 2

   The board of Ashgrove Ltd is deciding whether to close a loss-making factory that is the main employer in a small town. Under s172 Companies Act 2006, how must the directors approach the decision?

   • A) They must act in the way 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, having regard to factors including the effect on employees, the community and the company's reputation
   • B) They must close the factory if that would maximise this year's profits, whatever the wider consequences
   • C) They must keep the factory open, because the interests of employees take priority over those of members
   • D) They must follow the instructions of the company's largest shareholder
   Show answer & explanation

   Answer: A) They must act in the way 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, having regard to factors including the effect on employees, the community and the company's reputation

   Section 172 requires a director to act in the way 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. In doing so they must have regard to listed factors, including the likely long-term consequences, the interests of employees, business relationships, the impact on the community and environment, the company's reputation and fairness between members. The duty is owed to the company, not to a particular shareholder, and stakeholder interests are factors to weigh rather than interests that override those of members. Short-term profit alone is not the test.

3. Question 3

   Petra is a director of Lowmoor Developments Ltd. Through her role she learns that a site ideal for the company is for sale. She tells the board the company cannot afford it, then buys the site personally through a company she owns, without disclosing her interest or obtaining authorisation. Has she breached her duties?

   • A) No, because the company could not afford the site, so it lost nothing
   • B) No, because she bought the site through a separate company
   • C) Yes, she has breached the duty to avoid conflicts of interest under s175, even if the company could not have bought the site
   • D) Yes, but only her duty to exercise reasonable care, skill and diligence
   Show answer & explanation

   Answer: C) Yes, she has breached the duty to avoid conflicts of interest under s175, even if the company could not have bought the site

   Section 175 requires a director to avoid situations in which they have, or could have, a conflict with the company's interests, particularly in exploiting property, information or opportunities. It is immaterial whether the company could have taken advantage of the opportunity (s175(2), and compare Regal (Hastings) v Gulliver). The duty is not breached if the matter has been properly authorised by the directors, but here there was no disclosure or authorisation. Using another company does not avoid the duty.

4. Question 4

   Without obtaining members' approval, a director buys from her company a non-cash asset whose value exceeds the statutory threshold for a substantial property transaction. What are the consequences under the Companies Act 2006?

   • A) The transaction is automatically void and the director commits a criminal offence
   • B) The transaction is voidable at the company's instance, and the director must account for any gain and indemnify the company for any loss
   • C) The transaction is valid because the board approved it
   • D) The transaction is valid, but the director is disqualified for a fixed period
   Show answer & explanation

   Answer: B) The transaction is voidable at the company's instance, and the director must account for any gain and indemnify the company for any loss

   Under s190, a substantial property transaction between a company and its director requires members' approval. Under s195, an unapproved transaction is voidable at the company's instance, unless restitution is impossible, third-party rights intervene, or the members affirm it within a reasonable time. The director must account for any gain and indemnify the company for any loss. Board approval is not enough. There is no automatic voidness, criminal offence or disqualification.

5. Question 5

   Conrad has been disqualified under the Company Directors Disqualification Act 1986. Despite this, he continues to act as a director of Thistle Ltd and runs its day-to-day management. Which statement is correct?

   • A) He commits no offence if the shareholders approved his appointment
   • B) He is liable only to repay any remuneration he received
   • C) He commits a criminal offence and is personally liable for the company's debts incurred while he acted in breach of the order
   • D) He commits an offence only if Thistle Ltd later becomes insolvent
   Show answer & explanation

   Answer: C) He commits a criminal offence and is personally liable for the company's debts incurred while he acted in breach of the order

   Acting in breach of a disqualification order or undertaking is a criminal offence under s13 CDDA 1986. Under s15, the disqualified person is also personally liable for the relevant debts of the company incurred while they were acting in breach. So is anyone who acts on their instructions knowing of the disqualification. Shareholder approval is irrelevant, and liability does not depend on insolvency.

6. Question 6

   Which of the following best describes a shadow director under the Companies Act 2006?

   • A) A director appointed by the board to fill a casual vacancy until the next AGM
   • B) A person, not formally appointed, in accordance with whose directions or instructions the directors are accustomed to act, other than advice given in a professional capacity
   • C) A non-executive director who attends board meetings but does not vote
   • D) Any professional adviser whose advice the board regularly follows
   Show answer & explanation

   Answer: B) A person, not formally appointed, in accordance with whose directions or instructions the directors are accustomed to act, other than advice given in a professional capacity

   Section 251 defines a shadow director as a person in accordance with whose directions or instructions the directors are accustomed to act. A person is not a shadow director merely because the directors act on advice given in a professional capacity. Shadow directors are subject to many directors' duties and to wrongful trading liability. Someone filling a casual vacancy, or a non-executive director, is a formally appointed director.

7. Question 7

   Fenella and Jago are the only two members of Pallant Ltd, a private company. Fenella wants to deal with four matters by written resolution, without holding a meeting. Which of the following CANNOT be passed as a written resolution, whatever level of support it receives?

   • A) Removing a director before the end of their term of office
   • B) Changing the company's name
   • C) Altering the articles of association
   • D) Authorising the directors to allot shares
   Show answer & explanation

   Answer: A) Removing a director before the end of their term of office

   Under s288 Companies Act 2006, a private company may not use a written resolution to remove a director under s168 or to remove an auditor before the end of their term. Both require a meeting so that the person concerned can be heard. Changing the name, altering the articles and authorising allotments can all be done by written resolution.

8. Question 8

   Redwing Ltd has a paid-up share capital of 200,000 £1 ordinary shares, all carrying voting rights. Members holding 12,000 of those shares ask the directors to call a general meeting to discuss the board's strategy. The directors refuse. Which statement is correct under the Companies Act 2006?

   • A) The directors may refuse, because the requesting members must hold at least 10% of the paid-up voting capital
   • B) The directors may refuse, because only members holding more than 50% of the voting capital can require a meeting
   • C) The directors must call a meeting only if the members' request is approved by special resolution
   • D) The directors must call the meeting, because the members hold at least 5% of the paid-up voting capital
   Show answer & explanation

   Answer: D) The directors must call the meeting, because the members hold at least 5% of the paid-up voting capital

   Under s303 Companies Act 2006, the directors must call a general meeting once they receive requests from members holding at least 5% of the paid-up capital carrying voting rights. Here 12,000 ÷ 200,000 = 6%, which meets the threshold. Under s304 the directors must call the meeting within 21 days of receiving the request, for a date not more than 28 days after the notice. If they fail, the requesting members (or those of them holding more than half of their total voting rights) may call it themselves under s305, and the company must reimburse their reasonable expenses.

9. Question 9

   What is the minimum period of notice required for the annual general meeting of a public company, unless all members entitled to attend and vote agree to shorter notice?

   • A) 14 clear days
   • B) 21 clear days
   • C) 28 clear days
   • D) 7 clear days
   Show answer & explanation

   Answer: B) 21 clear days

   Under s307 Companies Act 2006, the AGM of a public company requires at least 21 days' notice, and other general meetings at least 14 days. Under s337, an AGM of a public company may be called on shorter notice only if all the members entitled to attend and vote agree. 28 days is the period for special notice of certain resolutions, not meeting notice, and 7 days has no basis in the Act.

10. Question 10

    Three friends set up Bramble Ltd and each held a third of the shares as directors on the understanding that all would take part in management. Two of them have now removed the third, Fern, as a director and stopped paying her any return, while paying themselves large salaries. What is Fern's most appropriate remedy?

    • A) A petition under s994 that the company's affairs are being conducted in a manner unfairly prejudicial to her interests, typically leading to an order that her shares be bought at fair value
    • B) A derivative claim in her own name to recover her lost director's fees personally
    • C) A claim under s33 that her removal breached the articles, which must lead to her automatic reinstatement
    • D) Nothing, because the majority has the right to remove a director by ordinary resolution
    Show answer & explanation

    Answer: A) A petition under s994 that the company's affairs are being conducted in a manner unfairly prejudicial to her interests, typically leading to an order that her shares be bought at fair value

    Bramble Ltd has the features of a quasi-partnership. Excluding a member from management, contrary to the understanding on which the company was formed, is classic unfair prejudice (Ebrahimi v Westbourne Galleries, O'Neill v Phillips). Under s996 the court can make any order it thinks fit, most commonly that the majority buy the petitioner's shares at fair value. A derivative claim is brought on the company's behalf for wrongs to the company, not for a member's personal loss. Lawful removal under s168 can still be unfairly prejudicial.