CILEx L6 Company Law 2 — Questions and Answers
Question 1: What is the 'business judgment rule' in relation to directors' duty of care?
- Courts are reluctant to second-guess commercial decisions made by directors in good faith within their authority — the duty of care focuses on process, not the quality of the decision (Correct answer)
- Directors are immune from liability for any business decision
- Courts apply the Bolam test from medical negligence to directors' decisions
- Directors are personally liable for all losses arising from decisions that prove wrong in hindsight
Correct answer: Courts are reluctant to second-guess commercial decisions made by directors in good faith within their authority — the duty of care focuses on process, not the quality of the decision
The objective standard in s.174 CA 2006 requires the care, skill and diligence of a reasonably diligent person with the general knowledge, skill and experience of someone in the director's position, and the director's actual skill. Courts generally do not substitute their commercial judgment for that of the board made in good faith.
Question 2: What is the procedure for a 'derivative claim' under Companies Act 2006?
- A shareholder applies to court for permission to continue a claim on behalf of the company against a director for negligence, breach of duty or trust, or breach of statute (Correct answer)
- Any shareholder may bring a derivative claim without court permission
- Derivative claims are only available for fraud on the minority
- Only the company can bring a derivative claim
Correct answer: A shareholder applies to court for permission to continue a claim on behalf of the company against a director for negligence, breach of duty or trust, or breach of statute
Under ss.261-264 CA 2006, a member may bring a derivative claim on behalf of the company, but must obtain court permission to continue it. The court must consider whether the claim is prima facie in the company's interests, whether the wrong has been ratified, and the views of independent shareholders.
Question 3: What are the consequences of a company failing to file its annual accounts and confirmation statement?
- The directors commit a criminal offence and the company may be struck off the register by the Registrar of Companies (Correct answer)
- The company becomes insolvent automatically
- The company loses its limited liability protection
- Shareholders may bring derivative claims against the directors
Correct answer: The directors commit a criminal offence and the company may be struck off the register by the Registrar of Companies
Under the CA 2006, failure to file annual accounts and confirmation statements (formerly annual returns) is a criminal offence by the directors. The Registrar may also strike off the company from the register if it appears to no longer be carrying on business.
Question 4: What is the test for wrongful trading under Insolvency Act 1986 s.214?
- A director who continues to incur liabilities knowing (or ought to have known) that there is no reasonable prospect of avoiding insolvent liquidation may be ordered to contribute to the company's assets (Correct answer)
- Any trading that results in losses makes a director personally liable
- A director is liable for wrongful trading only if they were dishonest
- Wrongful trading liability applies only to shadow directors
Correct answer: A director who continues to incur liabilities knowing (or ought to have known) that there is no reasonable prospect of avoiding insolvent liquidation may be ordered to contribute to the company's assets
Under s.214 Insolvency Act 1986, a liquidator may apply for an order against a director who continued to trade when they knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, unless the director took every step to minimise losses.
Question 5: What is the Companies Act 2006 s.172 duty and its significance for ESG considerations?
- The duty to promote the success of the company for the benefit of its members as a whole, having regard to the interests of employees, suppliers, community, environment, and long-term consequences (Correct answer)
- The duty to maximise short-term shareholder returns
- The duty only to consider the interests of major shareholders
- A duty to comply with all relevant environmental regulations
Correct answer: The duty to promote the success of the company for the benefit of its members as a whole, having regard to the interests of employees, suppliers, community, environment, and long-term consequences
S.172 CA 2006 requires directors 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, having regard to long-term consequences, employee interests, environmental impact, and community relationships — the 'enlightened shareholder value' model.
Question 6: What is the difference between a 'private company' and a 'public company' under the Companies Act 2006?
- A private company (Ltd) cannot offer shares to the public; a public company (plc) has a minimum share capital (£50,000), can offer shares publicly, and is subject to stricter disclosure and governance requirements (Correct answer)
- A private company has unlimited liability; a public company has limited liability
- A private company cannot have more than 50 shareholders
- A public company must always be listed on a stock exchange
Correct answer: A private company (Ltd) cannot offer shares to the public; a public company (plc) has a minimum share capital (£50,000), can offer shares publicly, and is subject to stricter disclosure and governance requirements
Under CA 2006, a private company (Ltd) cannot offer shares to the public and has fewer restrictions. A public company (plc) must have at least £50,000 of allotted share capital, can offer shares to the public, and is subject to additional requirements including the Listing Rules (if listed).
CILEx L6 Company Law 2
What is the 'business judgment rule' in relation to directors' duty of care?