Breach of Director's Duty in Companies Act 2006

This article discusses the breach of director's duty in accordance with the Companies Act 2006. It explores the consequences and remedies for breaching fiduciary duties and the duty of due diligence. The case of John and Sarah exploiting business opportunities without board permission is analyzed. The article also examines the role of articles of association in governing a company and the advantages and disadvantages of bank loans and preference shares.

Accounting business
law

Question 1........................................................................................................................................3
1...................................................................................................................................................3
2...................................................................................................................................................4
Question 3........................................................................................................................................5
a....................................................................................................................................................5
b...................................................................................................................................................6
REFERENCES................................................................................................................................8

Question 1
1.
Issue – As per the case, the main issue reflected as John and Sarah were personally
exploiting the opportunity of collaborating with Lively Parties Ltd even the Board stated that the
company seems as too young to take this opportunity. After collaboration, they made money of
around 1000 pound by exploiting this opportunity.
Rule – In accordance to Companies Act 2006, different consequences are stated that shows
the breach of Directors general duties. This act preserves an existing civil conditions relating to
the breach of a general duties. For the breach of the fiduciary duties (that is all types of duties
except duty of the reasonable care, diligence and the skill) the conditions of the breach might
include:
 Compensation or the damages where company had suffered the loss;
 Restoration of an entity’s property;
 Account of the personal profits that is been made by directors from any other company;
 Rescission of the contract under which the director failed or does not discloses his or her
interest.
For breach of duty in order to exercise due diligence, skill and reasonable care, main remedy
would be deemed as damages. At present, shareholder could ratify most of the breaches;
however, the new provision indicates that in case of the breach of director’s or default at part of
director, vote of any of the person who is directly or indirectly connected with the director who is
in question is been disregarded. This is depicted as the significant change to principle of the
majority rule although it does facilitate increased protection for the minority shareholders.
Connected person in accordance to the companies Act 2006 is defined as the person who is
connected with director in case if they are the member of director’s family that involves civil
partner, spouse and any of the person whom director lives a partner in enduring the family kind
of relationship, a stepchild or a child and director’ parents. Company seems as connected with
director if he or she has interest of 20% or more of equity capital of an entity or could exercise
greater than 20% of voting power at general meeting of company. There are some similar

provisions that serve to connect person with director with regards to trust set for benefit of such
director or his family and relating to partner of director.
There also present some criminal sanctions r the fines on director for breach of duty for the
purpose of declaring their interest in the prospective contract. As general duties are mainly owed
to company, it is only a firm which could take an action against the director for a reach. This
could happen as the result of decision of most of directors or action that could be initiated by
liquidator or under new types of derivative claim process by one or more of the shareholders.
Application- According to the rule stated in companies Act 2006 in relation to the breach
of Director’s duty, in this case there is a breach made by director John and Sarah as they earn
personal profits of pound 1000 by collaborating with Lively parties Ltd. This shows that had a
personal interest in the business of that company and without the board permission they decided
for exploiting business opportunities offered to them for the purpose of making profits.
Conclusion- The above analysis shows that John and Sarah both were liable for the
breach of their duties and are liable to the pay for the fines and the penalties that are charged
under the companies Act 2006. They need to compensate or pay the fines or charges that are
associated with breach of duty.
2.
Issue – Referring to this case, the major issue is that John, Lucy and Sarah has not
submitted documents of company’s annual report to registered office of an enterprise and is not
seen as engaging with administrative demand in running the corporation.
Rule- In accordance to Companies Act 2006, there is mainly 7 general duties that are
specified by the act which the directors need to follow-
Acting as per constitution of company and exercise only those powers for they were been
conferred
Promoting success of an entity for the sake of its members as whole with respect to-
 Interest of employees present in the firm

 The requirement to foster the business relationship with company’s customers and the
suppliers
 Impact or effect of company’s operations on society and environment
 Desirability of firm in maintaining reputation for the high standards of the business
operations
 Require to act fair among members of an enterprise
 Likely condition of taking decision in long run
Exercising independent judgment
Exercising skill, care and due diligence
Avoiding conflict of an interest- specifically in exploitation of any kind of business opportunities
Not accept benefits from the third parties
Declaring to other directors any kind of interest in the proposed arrangement or the transaction
with the firm
In case if the director does not work by taking into account all his duties indicated above, he or
she might deemed as liable for breach of their duties.
Application- With regards to the case as John and Sarah are not disclosing company’s
annual reports and not submitting it to the company house, they are responsible for breach of
their respective duties as a director of company as per the Company law Act 2006.
Conclusion – Thus from the above rules and application it has been summarized that
John and Sarah has made breach of duty and are liable for the punishment and penalties.
Question 2
Evaluating the role of the article of association (AOA) to contribute towards company.
The articles of association (AOA) is considered to be as one of the most prominent
document which is needed to set up a limited organization within UK. Articles of association is
highly significant because it is very useful in outlining the various rules and restrictions which
helps the company to govern, own and operate their business operations in a prescribed manner
(Davies, and et.al., 2016). The key purpose of the articles of association is that, it is very useful

in setting certain set of prescribed rules which helps the company to carry out their business
operations. The AOA also tends to put restrictions on the organization’s power which is very
useful for pursuing specific set of action without the approval of the shareholder. The
shareholder can effectively enter into the prescribed relation which helps keeping business
running in order to keep the company out of the public domain. The key and prominent role of
the articles of association is that, this document is very prominent in laying down key tasks
which has to be accomplished within the organization. It is mainly linked with the appointment
of key directors and also effectively handling the key financial records of the organization. It is
very significant in outlining the methods for accomplishing the day to day business activities
(Bradshaw, 2016). It is very useful in identifying the manner according to which company will
issue shares, provide voting rights, auditing financial records and payment of the dividend is all
prescribed within the articles of association. The key reason and the purpose for which the
company has been created has been significantly mentioned within AOA. The key role of the
articles of association is that, it tends to focus on providing details associated with the type and
number of shares that comprise the capital of the company is effectively listed within articles of
association. For example, in the case of Percival v Wright, the directors tends to owe a duty to
organization and to not the shareholders of company. As per S172 of Companies act 2006,
rectify this and states that, a director of the organization must act in a good faith in order to
promote the success of the organization for the welfare of the associates as a whole. Moreover,
the organization is preferred S172 of Companies act 2006 will help in bringing the shareholders,
associates and organization altogether.
The prominent proposition that the AOA of an organization form a contract between it and the
members.
Article of association of the company tends to form a contract between company and the
members. This contract between the company and the members is considered to be highly one of
the most crucial document because it helps in establishing and governing the ordinary
obligations and rights which in turn has been highly incidental in order to have appropriate
membership with the organization (Nardotto, Valletti and Verboven, 2015). It is very useful in
defining the roles, duties, responsibilities, obligations of the members and directors within the
organization. It helps in significantly defining the rules and responsibilities of the members.
Article of association is useful in binding the member with the company. If the member of the
organization tends to breach the Article of association then it eventually results in voidable
action and necessary action will be taken. Article of association is highly significant because it
helps in regulating the internal management of the organization and is also useful in defining the
powers to the members. For example, in the case of Borland’s Trustees v. Steel Bros. & Co.
Ltd., states that, the articles of the organisation provides that, in the case of bankruptcy of any
member will result in selling of shares at a price fixed by the directors. However, when Borland has
gone bankrupt, the trustee has stated to sell these shares at the original price and he was contended
that he could do so because he was not destined by the articles. However, he was bound to abide with
the article of the company since the shares were bought as per the provisions of the articles. Each

member of the organization is legally bound to the organization and also adhere to certain set of
provisions of the article of association (Goodrich and et.al., 2016).
Question 3
a.
Bank loan involves lending of funds by private or public organization like commercial
banks or financial institutions in exchange for a fixed rate of interest which is to be paid during
fix intervals of time.
The advantages and disadvantages of bank borrowings are as follows:
Advantages-
1. A bank loan is temporary which means once the loans are repaid along with the interest
amount, there is no other obligation left unlike equity financing or share issue where the
investors and shareholders still own equity in the business (Duqi, Tomaselli and
Torluccio, 2018). It is beneficial as it helps the company in retaining its full control over
its financial operations without any external intervention.
2. The interest paid on bank loans is tax deductible which means the interest paid by
company towards the loans is tax deductible. Also, there is a fixed rate of interest which
is to be paid monthly thus it makes easy for the firm to prepare a planned budget
systematically.
Disadvantages-
1. The major demerit of attaining bank loans is to qualify to get one which means that banks
and financial institutions require a lot of documents and financial statements to prove that
the company has a good annual turnover and has strong financial statements so that it can
pay the principle amount with interest timely. Unfortunately, many companies fail to
qualify for the loan requirements.
2. In majority of the cases, the rate of interest charged by banks is very high and it becomes
difficult for business to repay it monthly. As a result, many companies especially the

newly formed start-ups obtain finance through equity or crowd funding rather than
obtaining from commercial banks.
b.
Preference shares – It refers to preferred stock issued by the company on which
dividends are been paid out to the shareholders before issuing common stock dividend.
Advantages
1. Preference shareholders receive a fixed amount of dividends before the common
shareholders could see for any money.
2. Issuing preference shares results in occupying smaller share of an overall mix of an
organization funding as compared to the debt or the common shares. It accounts for lesser
than the 10% of an entity’s overall funding sources.
3. Preference shares has higher and more regular dividend, it seems as less volatile than the
common stock & carries very less risk.
4. In case the firm does not pay dividend to preference shareholders, it has to repay all
money to them before making payment of dividend to the common shareholders.
Disadvantages-
1. Although they are considered as less risky than stocks but are found as riskier than bonds
and might not offer better income from the dividends than interest on the bonds (Sutrisno,
2017). Due to added, investors who have own the preferred stocks can see large amount
of short run losses as compared to the bonds.
2. In case an entity fails, preference with regards to repayments is provided to bond holders
and thus this adds for the default risk to the holders of preference shares.

REFERENCES
Books and journal
Bradshaw, J. ed., 2016. The Well-being of Children in the UK. Policy Press.
Davies, and et.al., 2016. Genome-wide association study of cognitive functions and educational
attainment in UK Biobank (N= 112 151). Molecular psychiatry, 21(6), pp.758-767.
Duqi, A., Tomaselli, A. and Torluccio, G., 2018. Is relationship lending still a mixed blessing? A
review of advantages and disadvantages for lenders and borrowers. Journal of Economic
Surveys. 32(5). pp.1446-1482.
Goodrich, J.K and et.al., 2016. Genetic determinants of the gut microbiome in UK twins. Cell
host & microbe, 19(5), pp.731-743.
Nardotto, M., Valletti, T. and Verboven, F., 2015. Unbundling the incumbent: Evidence from
UK broadband. Journal of the European Economic Association, 13(2), pp.330-362.
Sutrisno, P., 2017. Earnings Management: An Advantage or Disadvantage?. Accounting and
Finance Review (AFR). 2(2). pp.64-72.