FLK1 · SQE1 module
Business Law and Practice
Business Law and Practice spans company formation and constitution, directors’ duties, shareholder decision-making, partnerships and business accounts.
Directors’ duties under the Companies Act 2006 are the single most tested topic, usually applied to a short scenario rather than asked as a definition.
What this module covers
- Company formation, constitution and share capital
- Directors’ statutory duties
- Partnerships and limited liability partnerships
- Company decision-making and meetings
A real question from this module
Try it before you decide
FLK1 · Business Law and Practice
Question
A director causes her company to enter into a supply contract with another business that she personally owns. She mentions the arrangement informally to the finance director over lunch, but the matter is never placed before the board, and the other directors do not turn their minds to it before the contract is signed. Which of the following best describes the position?
- AShe has complied with her duties, because informally telling one other director satisfies the disclosure requirement
- BShe has breached her duty to declare an interest in a proposed transaction with the company, since disclosure must be made to the board
- CShe has breached her duty to avoid a conflict of interest, since this type of arrangement can never be authorised by directors
- DShe has complied with her duties, because shareholder approval is only required for transactions above a set financial threshold
- EShe has breached her duty to exercise independent judgment, since she allowed her personal interests to affect her decision
Show the answer and why
Answer B
Where a director has an interest in a proposed transaction with the company itself, the duty is to declare its nature and extent to the board before the company enters into it. Telling one director informally, rather than declaring it to the board as a whole, does not satisfy this. This is distinct from the duty to avoid conflicts with the company’s business or opportunities outside a transaction with the company, which instead requires formal authorisation by the other directors, and a financial threshold for shareholder approval is not what makes a declaration under this duty necessary.
Companies Act 2006, s.177 (duty to declare interest in proposed transaction with the company).