CILEx L6 Company Law 2

Question 1

What is the 'business judgment rule' in relation to directors' duty of care?

Accepted 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

Answer

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?

Accepted 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

Answer

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?

Accepted Answer

The directors commit a criminal offence and the company may be struck off the register by the Registrar of Companies

Answer

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?

Accepted 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

Answer

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?

Accepted 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

Answer

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.

CILEx Level 6 Practice Test

CILEx Level 6 Practice Test

CILEx L6 Company Law 2