corporate sec june09 sas pdf

8/2/2019 Corporate Sec June09 SAs PDF

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Page 1 of 22 ICSA, 2009

CORPORATE SECRETARYSHIP

JUNE 2009

SUGGESTED ANSWERS AND EXAMINERS COMMENTS

IMPORTANT NOTICE

When reading these answers, please note that they are not intended to be viewed as adefinitive model answer, as in many instances there are several possibleanswers/approaches to a question. These answers indicate a range of appropriate contentthat could have been provided in answer to the questions. They may be a different length orformat to the answers expected from candidates in the examination.

EXAMINERS GENERAL COMMENTS

There was further increased exposure to the Companies Act 2006 (CA 2006) in thisexamination. For example, the requirement for private companies to have a CompanySecretary was explored for the first time. In view of the many different changes broughtabout by the CA 2006, candidates are urged to ensure they have the most recent study textand that they keep up to date by appropriate further reading.

Im disappointed to say that the presentation of candidates responses has notimproved since

the last exam. The handwriting in too many papers was very poor and in a few placesillegible. Candidates are of course reminded that marks cannot be awarded for portions of theanswer script which are illegible.

There was a lack of attention to basic exam technique in too many instances, for example,not starting each question on a separate page. In addition, some candidates repeated thetext of the question unnecessarilythis makes the examiners task more difficult and wastesthe candidates time.

Candidates are also reminded of the importance of presenting their answers in the requested

format. As can be seen in the following pages, this is a practical exam and hence marks maybe available for the format as well as the content of each answer.


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SECTION A(Compulsoryanswer all parts of this question)

1. (a) Explain the provisions within the Articles of Association in respect of ashareholders proposal for the appointment of a director of a company.

(4 marks)

SUGGESTED ANSWER

Table A reg. 76 states that shareholders may requisition a proposal at a general meetingto appoint or re-appoint their proposed director. Certain conditions must be met:

notice must be given to the company by shareholders not less than fourteen normore than thirty-five clear days before the date appointed for the meeting;

the notice must be accompanied by the particulars of the proposed director (i.e.the details which would be required to be included in the companys register ofdirectors); and

the notice must be executed by the proposed director to indicate his / herwillingness to be appointed or reappointed.

EXAMINERS COMMENTS

This was a poorly answered question. Many candidates simply quoted statutoryprovisions on the requisition of a shareholder resolution. Candidates are reminded of the

importance of knowing all of the provisions of the Articles of Association.

(b) What criteria must a company meet in order for it to be admitted tothe Alternative Investment Market (AIM)? How does this generallydiffer from the admission requirements to the Official List? (4 marks)

SUGGESTED ANSWER

The AIM is the London Stock Exchanges market for smaller public limited companies.The requirements for admission to AIM are less demanding than those for the Official

List. The company does not have to be a particular size or have a lengthy trading historyand it is not required to have a certain percentage of its shares in public hands.However, where the companys main activity is a business which has not beenindependent and revenue earning for at least two years, it must agree that any directoror employee owning more that 0.5 per cent of the shares must not dispose of them forat least one year from the date of admission. To be admitted, a company must appointand maintain a nominated broker and a nominated adviser to help the directors meettheir obligations and to bring together buyers and sellers of the companys shares in themarket.


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EXAMINERS COMMENTS

Mostcandidates were aware that the AIM was the market for smaller companies andgenerally had less stringent requirements than the Official List. However, manycandidates failed to mention the role of the nominated broker and nominated adviser,which is very important for AIM companies.

(c) Describe the main categories of information contained in an annualreturn for a limited company. (4 marks)

SUGGESTED ANSWER

There are some fifteen categories of information in the annual return. The maincategories are the following:

the company number; the company name in full; the date of the current return, i.e. the date at which it is made up, not more

than one year since the previous one; the date of the next return; the registered office address; principal business activities (based on the UK Standard Industrial Classification

Codes); the location of the register of members, together with the address where the

register is kept if this is not the registered office; the location of the register of debenture holders (if there are such holders); the company type, e.g. private company limited by shares; thecompany secretarys name and address (if any); the directors and their notifiable details; the issued share capital; list of past and present shareholders (a full list of shareholders for a private or

non-traded public company / a list of shareholders holding at least 5% of theissued shares of any share class for a traded public company. Shareholdersaddresses must not be given for non-traded public companies);

whether the company is or is not a traded company; signature of a director or the company secretary and the date it is signed; contact details of a person who can be contacted should there be any queries.EXAMINERS COMMENTS

Candidates were not expected to be able to name all of the above categories. Mostcandidates were able to provide adequate responses but a worrying amount ofcandidates confused the contents annual return with that of the annual report &accounts. Candidates should be aware that for UK company law, the annual return andannual report & accounts are two very different documents which serve very differentpurposes.


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(d) In respect of employee share schemes, explain what is meant by theterms all employee schemes and discretionary schemes. (4 marks)

SUGGESTED ANSWER

An all-employee scheme is a scheme which the company intends all, or substantially all,

of its employees to participate in. For example, the savings-related scheme or the shareincentive plan.

The opposite of an all-employee scheme is a discretionary scheme. This is where thecompany intends that only a selected group of employees, usually defined by theirseniority, business function, or duration of service to the company, will participate. Anexample of such a scheme is a company share option scheme.

EXAMINERS COMMENTS

Most candidates were able to describe both types of share schemes and the betteranswers provided examples of each scheme to demonstrate their understanding of thequestion.

(e) What are the provisions in Table A in respect of the convening of boardmeetings? (4 marks)

SUGGESTED ANSWER

The following provisions are contained in Table A in respect of the convening of boardmeetings:

Article 88 provides that the directors may regulate the proceedings of boardmeetings as they think fit.

Article 88 also provides that a director may, and the secretary at the request ofa director shall, call a meeting of the directors.

Article 88 states that it shall not be necessary to give notice of a meeting to adirector who is absent from the United Kingdom.

Article 66 provides that an alternate director shall be entitled to receive notice ofall meetings. However, he or she is not entitled to notice of such a meeting if heor she is absent from the United Kingdom.

EXAMINERS COMMENTS

The quality of responses to this question was generally disappointing. Many candidatessimply wrote about procedures during board meetings, instead of the procedures forconvening them. Again, this showed a lack of understanding in respect of the Articles of

Association.


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(f) What information is required by statute to be maintained in theregister of members of a company with a share capital? (4 marks)

SUGGESTED ANSWER

Pursuant to CA 2006 s. 113 the information to be maintained on the register of member

is:

name and address of member; date that person became a member and the date on which that person ceased

to be a member if applicable; number, and class of share held and cash amount or non-cash consideration

paid; details where shares have been converted to stock; share warrants; a company with more than 50 members must keep a separate index in the

same place as the register to enable easy access to the data; an entry relating to a former member of the company may be removed from the

register 20 years after the date on which he ceased to be a member (CA 2006 s.352). From October 2009, this period will reduce to 10 years (CA 2006 s. 121).

EXAMINERS COMMENTS

Most candidates provided adequate responses to this question. The majority ofcandidates did not, however, mention the requirement to keep an index where there are50 or more members. This is an important feature which is usually the responsibility ofthe Company Secretary or their agent.

(g) What are the statutory provisions in respect of shareholders rights toraise concerns about the audit of a quoted company? (4 marks)

SUGGESTED ANSWER

S. 527 CA 2006 introduces a new provision which gives shareholders of a quotedcompany the right to have a statement placed on the companys website ahead of ageneral meeting at which the accounts are to be considered. The statement shall be inrelation to the audit of the accounts or any issue surrounding an auditor who has ceasedto hold office. In order for the statement to be placed on the companys website, it mustbe requisitioned by members representing at least 5% of the total voting rights or by100 members holding paid up shares on average sum per member of not less than100.

EXAMINERS COMMENTS

This is a new feature introduced by the CA 2006 and it was disappointing to see thatmany candidates had not kept up to date with this provision. Many candidates confusedthis with processes to remove or not appoint an existing auditor, which is a differentmatter.


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(h) What are the provisions in the Articles of Association in respect ofpartly paid shares held by a shareholder? (4 marks)

SUGGESTED ANSWER

The provisions in the Articles of Association in respect of partly paid shares held by a

shareholder are:

partly paid shareholders are liable to pay any unpaid share capital at the requestof the directors (known as a call);

failure to pay a call may lead to interest penalties or forfeiture of shares (byresolution of the board);

Article 8 gives the company a first lien on every share which is partly paid; Article 24 allows directors to refuse to register a transfer of shares if it is to a

person whom they do not approve; Article 104 permits directors that dividends may be paid pro-rata to the amount

paid up on the respective shares.

EXAMINERS COMMENTS

Mostcandidates were aware that the directors could make a call to pay and that if ashareholder fails to pay this could lead to forfeiture of the shares. On the whole, thisquestion was well answered by candidates.

(i) What information is legally required to be shown on the letterhead ofa company? (4 marks)

SUGGESTED ANSWER

The following information is required to be shown on the letterhead of a company:

the registered office address; a list of the names of all the directors, or none of them; the company name, as registered at the Registrar of Companies. If the trading

name of the company is different, this may be shown in addition to theregistered name;

the companys registered number; the country of registration (i.e. the jurisdiction under which the company isincorporated); if the company has an exemption from using the word `limited, a statement

that the companys liability is limited; if the company is required to be authorised and regulated by a statutory body,

for example, the Financial Services Authority, a statement that the company isso authorised and regulated.

EXAMINERS COMMENTS

Candidates performed well on this question and were able to provide, on the whole,good answers.


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(j) Explain what is meant by a dormant company. Are dormant companiesrequired to file accounts with the Registrar of Companies, and arethere any applicable statutory provisions? (4 marks)

SUGGESTED ANSWER

A dormant company is one which has no significant accounting activities during itsfinancial year. Dormant companies must file annual accounts with the Registrar ofCompanies. Companies are able to use Form DCA to make this process simpler.

Dormant accounts automatically qualify for audit exemption. Directors only need toprepare abbreviated accounts which must include a declaration that they acknowledgetheir responsibility for preparing accounts which give a true and fair view and that thecompany qualified as dormant for the accounting period.

EXAMINERS COMMENTS

Most candidates could provide an adequate definition of a dormant company and it waspleasing to see some candidates refer to Form DCA to demonstrate their understandingof the question. A few candidates incorrectly thought that a dormant company was notrequired to file accounts with the Registrar of Companies.


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SECTION B(Answer THREE questions from this section)

2. You are the Assistant Secretary of Computer Chips plc, a company listed onthe London Stock Exchange. The company will be holding its Annual GeneralMeeting (AGM) in a few months. To ensure it is well planned, the CompanySecretary has asked you to produce a note setting out what actions he shouldtake before the AGM, and what documents need to be prepared and/orissued.

REQUIRED

Prepare a suitable note for the Company Secretary. (20 marks)

SUGGESTED ANSWER

Computer Chips plc

2009 ANNUAL GENERAL MEETINGNOTE TO THE COMPANY SECRETARY

Introduction

As requested, I have prepared the below note which sets out what actions should betaken before the AGM and what documents need to be prepared and/or issued.

AGM Venue

You should advise the chairman of the estimated attendance at the meeting so that aroom can be booked that will be suitable in terms of size, availability, cost and quality.

As you know, the Secretary is usually responsible for finding, evaluating and hiring anappropriate venue in plenty of time before the AGM.

It is essential for the Secretary to check practical details, for example, catering, roomlayout, security, access and facilities for the disabled, health and safety arrangementsand audio-visual arrangements. These practical details are usually dealt with during apre-meeting with those responsible for managing the meeting venue.

Annual Report, Notice of AGM and Proxy Card

The audited accounts, notice of AGM and proxy form must be submitted to andapproved by the board. Three proof copies of the report and accounts should be signedoff. A director must sign the balance sheet, either the secretary or a director must signthe directors report and the signature of the auditor is needed on the auditors report.

As the company is listed, the signature of a director or secretary should also appear atthe end of the remuneration report within the report and accounts. For the notice, thechairman may sign his statement (if applicable) and the secretary usually signs thenotice of the meeting by order of the board. Keep one of the three signed copies of thereport and accounts with the companys records, send one to the Registrar of

Companies and the other to the auditors.


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Other Preparatory Actions

In addition, the following matters need to be dealt with ahead of the AGM:

advise the external registrar of the recommended dividend so that they canprepare the dividend warrants for dispatch to shareholders following approval at

the AGM;

arrange with the bankers for a dividend account to be opened so that themoney required to pay the dividend can be deposited;

instruct printers to print the notice of AGM, annual report and proxy form andfor it to be dispatched observing applicable notice requirements (and CombinedCode recommendations);

in accordance with the Disclosure and Transparency Rules, place the AnnualReport and notice of AGM on the companys website;

invite the companys solicitors or other appropriate advisors to attend themeeting. Auditors are entitled to attend anyway. Instruct the companysregistrars to attend;

prepare ballot papers for the event of a poll being demanded; prepare an agenda for use by the board. In some circumstances it may be

useful to prepare a more detailed agenda / script for the chairman, togetherwith prepared answers to awkward questions;

prepare attendance sheets to register attending shareholders, the press, proxiesand representatives;

make the register of members available for inspection in case it is necessary toidentify the people attending the meeting, to ensure that only those entitled tobe there are present;

make copies of the non-executive directors letters of appointment (CombinedCode recommendation) available for inspection. Although no longer a listing

rule requirement, many listed companies make their executive directors servicecontracts also available for inspection at the AGM;

prepare name cards and/or name badges for the directors and organiseproposers, seconders and scrutineers if required.

Recent Trading Performance

In listed companies, the directors sometimes take the opportunity to updateshareholders on the companys recent trading performance, its trading outlook, or

perhaps on changes in the composition of the board. The Secretary should be briefed ifsuch an update will be made because such a statement will have to be released to the


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market through a regulatory information service. The release of such announcementsmust be timed to coincide with the directors address to the meeting.

Returned Proxy Forms

The Secretary should check returned proxy forms against the register of members and

report the result of the proxy count to the board after the expiry of the deadline forreceipt (usually 48 hours before the meeting). For listed companies, a short report ofthe proxy votes lodged should be prepared for putting on the companys website (and /or for release through a Regulatory Information Service) and for handing out tointerested shareholders following the meeting.

I trust the above information is helpful.

Regards

Assistant Secretary, Computer Chips plc

EXAMINERS COMMENTS

This was a popular question with candidates and most candidates did well as itrepresents some of the most familiar core learnings of the syllabus. Some candidatesmissed out on obvious matters, such as booking the AGM venue, preparing dividendarrangements and preparing the annual report for dispatch these represent some ofthe most important duties of a Company Secretary and must be adequately addressed

in a question such as this.


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3. You are the Company Secretary of Hugo plc, a company which is not listed onany stock exchange. At a board meeting, the following issues arise withrespect to dividends:

(a) Mr Spin, the Marketing Director, has asked you if the Companies Actcontains any restrictions on a companys ability to pay dividends. He is

also concerned that the financial position of the company has changedconsiderably since the last accounts were prepared, and asks you ifthere are any statutory requirements which need to be observed inrelation to the companys ability to pay dividends. The company hasordinary shares, preference shares, and debentures, and he asks youwhether the company is obliged to pay on each of these, and whetherthere is any particular priority. (11 marks)

(b) The Sales Director asks you to explain the difference between interimdividends and final dividends, and the authorities required prior topayment of either. (4 marks)

(c) The Chairman asks you to draft an appropriate minute in respect ofthe consideration and approval of an interim dividend on ordinaryshares. (5 marks)

REQUIRED

Provide the advice requested in (a) and (b) above, and draft an appropriateminute in respect of (c). (Total: 20 marks)

SUGGESTED ANSWER

HUGO PLC

ADVICE REGARDING DIVIDENDS

I refer to the recent discussion at the Board meeting regarding dividends. As promised,I have provided further advice regarding the queries:

(a) Ability to pay dividends

A company may not make a dividend distribution except out of distributable profitsavailable for the purpose (Companies Act 2006 s. 830). These are defined as acompanys accumulated realised profits less its accumulated realised losses. Dividendpayments may not be made out of capital, which must be maintained so that thecompany can meet its liabilities due to creditors. Public companies must ensure that theproposed distribution does not reduce the net assets of the company to less than theaggregate of the companys called-up share capital and its undistributable reserves.

If the last annual accounts show that there are insufficient distributable profits to make

a distribution, or if the companys financial situation has changed considerably since theannual accounts were prepared, the directors must prepare and refer to more recent


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interim accounts. These must be prepared to such a standard that they would enable areasonable judgement to be made as to whether there are sufficient distributableprofits. The interim accounts prepared by a public company must comply with the rulesfor preparing annual accounts. The interim accounts do not need to be audited, but theymust be filed with the Registrar of Companies.

Directors are not obliged to pay dividends on ordinary shares or preference shares(unless the preference shares carry a fixed dividend entitlement) and may not pay suchdividends if there are insufficient distributable reserves. Ordinary shares rank afterpreference shares for the purposes of dividends. For preference shares, there is usuallya fixed rate of dividend often expressed as a percentage and it is deemed to becumulative,unless stated otherwise. This means that, should a company fail to pay thedividend due, it will accrue to the shareholder and become payable, together with thenext dividend due, at the next payment date. If profits were available (and if they werecumulative preference shares), any amount unpaid would need to be carried forward tofuture year(s) when profits become available.

Debentures are effectively loans to the company by investors and are not a class ofshare. Interest on debentures ranks ahead of the payment of dividends on eitherpreference shares or ordinary shares. Interest on debentures must be paid, even if thecompany does not have sufficient distributable reserves, and failure to pay may lead toan event of default.

(b) Interim and final dividends

A final dividend is paid after the end of the financial year, based on the final auditedaccounts for the immediately preceding year. An interim dividend is any dividend which

is paid before the end of the current financial year in respect of distributable profits forthe current financial period.

Article 102 of our Articles of Association requires shareholders to approve the finaldividend by ordinary resolution. However, Article 103 permits interim dividends to bepaid between general meetings and do not need the approval of shareholders. Thepower to pay interim dividends is usually delegated to the directors who must besatisfied that the payment is justified by sufficient distributable profits.

(c) Draft minute for an interim dividend

X proposed that an interim dividend of [x] pence per ordinary share be paid. The boardreviewed a set of interim accounts for the purposes of considering the payment of aninterim dividend. Following a review of the interim accounts, the directors were satisfiedthat there were sufficient distributable profits to pay the interim dividend. Followingfurther deliberation, IT WAS RESOLVED THAT an interim dividend of [x] pence perordinary share be paid on x 2009 to shareholders on the register of members at x 2009.

The Company Secretary was instructed to make the necessary arrangements in respectof the payment of the interim dividend.


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Regards

Company Secretary, Hugo plc

EXAMINERS COMMENTS

Most candidates were able to provide adequate explanations of the CA 2006 provisionson a companys ability to pay dividends and the prioritisation of debentures, preferenceshares and ordinary shares. However, a worrying amount of responses did not state thatif the companys financial position had changed considerably, that interim accountsneeded to be prepared before a decision on dividends could be made. This is a keygovernance and statutory compliance issue on which directors should be able to look tothe Company Secretary to provide guidance.

Most candidates could provide adequate explanations of both final dividends and interimdividends.

In respect of part (c), this was on the whole weaker. Many candidates missed out keypoints for inclusion in the minute, such as confirmation that there were sufficientdistributable reserves, the record date and the payment date. Again, the directors willbe looking to the Company Secretary to ensure that these details have been consideredand have been appropriately authorised by the board.


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4. You are the Company Secretary of Sharp Ends plc, a company listed on theLondon Stock Exchange. Sharp Ends plc has an issued share capital of 100million shares. Mrs Chief, the CEO, advises you that she suspects Predator plchas recently acquired five million shares in Sharp Ends plc, but that theshares are not registered in Predator plcs name. Mrs Chief asks you thefollowing:

(a) How to discover the identity of the owner of the five million shares inquestion. She is concerned about how the stock market would react ifPredator plc is the owner of the shares, and has asked you whetherthere is any requirement to disclose any information under statute orunder listing regime obligations. She also asks you what statutoryregisters would need to be updated if Predator plc were the owner ofthe shares. (10 marks)

(b) To explain when the City Code on Takeovers and Mergers (the Code)would apply, and the key general principles of the Code. (10 marks)

REQUIRED

Provide the advice requested in parts (a) and (b) above. (Total: 20 marks)

SUGGESTED ANSWER

SHARP ENDS PLC

SHAREHOLDING IN THE COMPANY

I am writing to you further to the queries about shareholdings in the Company.

(a) Predator plc

Under Companies Act 2006 s. 793, a public company can investigate the true ownershipof its shares by sending a written notice to any person whom it knows, or has reason tobelieve, is interested in the voting shares of the company, asking for information aboutthe identity of the persons interested, the number of shares held and the dates whenthe interest was acquired. A company can investigate both current shareholdings and

shareholdings over the last three years. The recipient is required to inform the companymaking the enquiry whether they have or had an interest, and if so, what the nature ofthe interest is or was. If the recipient fails or refuses to respond, the company is entitledto seek permission of the court to impose restrictions in respect of the shares underinvestigation.

Public companies are required to maintain a register of interests in respect ofinformation held on a companys shares. The register must include all responses from ashareholder under s. 793 CA 2006 investigation. As the register must be made availablefor inspection, it is not possible to keep the identity of the true holder of the shares

undisclosed.


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In addition, as the company is listed on the London Stock Exchange, it is subject to theDisclosure and Transparency Rules. This requires anyone with an interest of 3% or moreof the listed company to notify the United Kingdom Listing Authority of such an interestand also to notify the listed company concerned. The listing company will be required torelease a stock exchange announcement through a Regulatory Information Serviceregarding the interest.

The Companies Act provides that share registers for companies registered in Englandand Wales can only show the registered name of the shareholder, not any trust orunderlying beneficial shareholding. Hence, any nominee company which is holding theshares on Predators behalf will be shown on the share register, and not Predator itself.

(b) City Code on Takeovers and Mergers

The Code sets out regulations for the takeover of shares in listed companies. It ispublished and administrated by the Panel on Takeovers and Mergers (the Panel) and hasmembers from influential bodies within the investment and business community. Itsprovisions apply when a bidder increases their shareholding to 30 per cent or more.

Professional financial advisers will need to be retained to advise on the merits of atakeover bid. These professional advisers will take the Code into consideration and areaware that breach of the Code could result in sanctions.

The prime objective of the Code is intended to ensure fair and equal treatment of allshareholders during a takeover. It does not set out to deal with the financial implicationsof a bid.

There are six principles of the Code:

all shareholders of the offeree must be given equivalent treatment; the shareholders of the offeree must have enough information to make an

informed decision on the bid and enough time to consider it;

the board of the offeree must act in the interests of the company as a wholeand must not deny shareholders the chance to decide on the merits of the bid;

false markets must not be created in the shares of the offeree, the offeror orany other company concerned by the bid; an offeror must ensure that they can meet any cash consideration in full before

announcing a bid;

an offeree company must not be hindered in the conduct of its affairs for longerthan is reasonable by a bid for its securities.

I trust the above information is helpful.

Company Secretary, Sharp Ends plc


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EXAMINERS COMMENTS

This was the least popular question with candidates. This is probably because thesubjects have not been tested for some time and have never been tested in theparticular combination as presented. It is possible that many candidates were notprepared for the question. Candidates are reminded that the whole of the syllabus is

examinable and that they should be fully prepared ahead of their exams.

There was a wide variance in the quality of answers to this question. Most candidateswere aware of the provisions of S.793 CA2006 but many candidates were not aware ofthe requirement to maintain a register of interests.

Most candidates could provide some of the key principles of the Code but manycandidates seemed to be unaware that the provisions come into effect when thebidders holding in the target company reaches 30%.


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5. You are the Secretary of Nice Shoes plc, a company which is not listed on anystock exchange. The Board is considering the following transactions with itsdirectors:

(a) Making two loans to its directors: firstly, a loan of 30,000 to Mr Man,the Human Resources Director; and secondly a loan of 9,000 to Mrs

Money, the Finance Director. (11 marks)

(b) Entering into two property transactions: firstly, a transaction with MrMans wife to sell to her a company car for 3,000; and secondly, atransaction to purchase Mrs Moneys former holiday home for150,000. Both transactions are at the appropriate market value.

(9 marks)

Mr Boss, the Chief Executive, has asked you to prepare a paper for the nextboard meeting which sets out:

Whether the proposed transactions can be entered into and, if so, thestatutory requirements which need to be considered, and anyapprovals to be obtained.

Any disclosures which should be made by the directors concerned. What would be the position of the company if it had already entered

into the transactions referred to in (b) above without the requisiteapprovals.

REQUIRED

Prepare a paper suitable for the next board meeting. (Total: 20 marks)

SUGGESTED ANSWER

NICE SHOES PLC

DIRECTORS TRANSACTIONS

As requested, I am providing further guidance in respect of the proposed transactionsby the directors.

(a) Loans to directors

Under s. 197 s. 214 Companies Act 2006, companies may make loans to directors.This is provided there has been prior approval by ordinary resolution of the members. Inorder for approval to be given in general meeting, there needs to be full disclosure inadvance by including the following information in a memorandum:

the purpose of the loan or transaction; the amount of the loan or value of the transaction; and

the liability to which the company may be exposed under the loan ortransaction.


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The memorandum must, at least, be available for inspection at the registered office forat least 15 days ending with the date of the meeting and must also be available forinspection at the place of the general meeting.

Shareholder approval is not required where loans are in respect of 10,000 or less, or if

the company is in the business of lending money. The loan to Mrs Money does not,therefore, require shareholder approval and may be approved by the board.

(b) Substantial property transactions

Companies Act 2006 s. 190 s.196 sets out the provisions in respect of substantialproperty transactions between a company and a director involving non-cash assets. Acompany may not transfer to a director, or a director to a company, a substantial non-cash asset unless approved by the company in general meeting. A substantial propertytransaction is one which involves assets which exceed 10% of the companys assets andis more than 5,000 or exceeds 100,000.

The provision includes connected personsto the director and hence Mr Man is includedby virtue of his spousal connection to Mrs Man. However, CA 2006 provides that noshareholder approval is required as the value is less than 5,000.

The transaction in respect of Mrs Money will require shareholder approval. Sufficientdetails of the arrangement will need to be provided to shareholders in order for them toconsider the proposal.

It is also important to consider the relevant provisions of the Companies Act 2006 in

respect of directors duties. The board will need to approve both loans (the larger loanbeing approved for consideration by the companys shareholders). S. 177 CA 2006provides that a director must declare a direct or indirect interest in a proposedtransaction or arrangement. Hence, both Mr Man and Mrs Money need to declare suchan interest prior to consideration by the board. S.175 CA 2006 requires that directorsmust avoid situations where they may have a direct or indirect interest which is, orcould, potentially be in conflict with the interests of the company. Following declarationof the potential conflict of interest, it will be up to the board to determine whether itshall authorise such a conflict. When the directors make the determination for such anauthorisation, the director who is the subject of the conflict of interest may not be

counted in the quorum of the meeting and must not vote on the matter.

A substantial property transaction which has not received the appropriate shareholderapproval, where required, is generally voidable. This could have serious implications forthe director concerned should the company subsequently become insolvent. It ispossible under s.196 CA 2006 for subsequent shareholder approval to be obtained toapprove the transaction in which case it will no longer be voidable.

Please do not hesitate to ask any questions if you require further guidance.

Company Secretary, Nice Shoes plc


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EXAMINERS COMMENTS

Most candidates were aware of the statutory provisions regarding loans and in particularthat shareholder approval would be required in certain circumstances. A few candidatesincorrectly applied the old provisions of Companies Act 1985 in respect of the proposedloans to the directors. Candidates are reminded of the importance of applying the most

recent statutory provisions where required. There was also a generally weakerperformance in the disclosure aspects of the question as many candidates did not statethat the purpose, amount and liability of the loan had to be disclosed.

Many candidates did not know the full statutory provisions regarding substantialproperty transactions, in particular the applicable definition (i.e. an asset which exceeds10% of the companys assets and is more than 5,000 or exceeds 100,000).Nevertheless, most candidates were aware that shareholder approval would be requiredin certain circumstances.

It was disappointing that many candidates missed an obvious point that a disclosure ofinterest would arise for the directors who were the subject to the loan or the substantialproperty transaction.


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6. You are the Assistant Secretary of Tasty Pasta plc, a company which is notlisted on any stock exchange. John Smith has recently resigned as theCompany Secretary of Tasty Pasta, and Jane Cash, the Finance Director, hasraised the following issues with you:

(a) Who is responsible for appointing and removing a new Company

Secretary, and for approving his/her appointment terms? Jane hasalso asked if there are any statutory registers which would need to beupdated, or any documents to be filed in this regard. (4 marks)

(b) John also resigned as Company Secretary of Cheesy Pizzas Ltd, asubsidiary of Tasty Pasta. Jane asks you whether there is a need toappoint a replacement for John for either company, and whether theperson replacing John needs to have any particular qualifications.

(8 marks)

(c) Jane would like to know the typical reporting lines in a company for aCompany Secretary, and also his/her powers and authority. (8 marks)

REQUIRED

Prepare the advice requested in (a), (b) and (c) above, including any relevantstatutory and Table A provisions. (Total: 20 marks)

SUGGESTED ANSWER

TASTY PASTA PLC

POSITION OF THE COMPANY SECRETARY

As requested, I am providing further guidance in respect of the position of the CompanySecretary.

(a) Appointment and removal of Company Secretary

The importance of the role of the Company Secretary is reflected through theappointment and removal process. Article 99 states that the Company Secretary shall be

appointed by the directors for such term, at such remuneration and upon suchconditions as they may think fit and the Company Secretary may be removed by thedirectors.

The appointment or removal of a Company Secretary must be entered on the register ofdirectors and secretaries and notified to Companies House by filing form 288a or 288brespectively.

(b) Requirement for a Company Secretary

Under the Companies Act 2006, all public companies are required to appoint andmaintain a Company Secretary. However, private limited companies are not required to


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appoint and maintain a Company Secretary. Where such an appointment is made theCompany Secretary has the same duties and responsibilities as he / she would hold in apublic company. Hence, only Tasty Pasta plc must appoint a replacement for John. Inpractical terms, where a private limited company does not have a Company Secretary,the directors will need to be vigilant that the duties normally associated with theCompany Secretary are carried out.

There is no legal requirement for a company secretary of a private limited company tohave professional qualifications or any previous experience. This would apply to CheesyPizzas if it chose to appoint a Company Secretary. However, in the case of Tasty Pasta,which is a public company, the Companies Act provides that the directors must take allreasonable steps to secure that the Company Secretary is a person who appears to havethe requisite knowledge and experience to discharge the relevant functions. S273Companies Act 2006 provides that the Company Secretary of a public company must bea person who:

is a barrister, advocate or solicitor, called or admitted in any part of the UK; for at least three of the five years immediately preceding his appointment held

the office of company secretary of another company other than a privatecompany;

is a member of any of the following professional bodies: Institute of Chartered Secretaries and Administrators; the Institutes of Chartered Accountants in England and Wales, Scotland or

Ireland; Chartered Institute of Management Accountants; Association of Chartered Certified Accountants; Chartered Institute of Public Finance and Accountancy

is a person who, by virtue of his holding or having held any other position, or hisbeing a member of any other body, appears to the directors to be capable ofdischarging those functions.

(c) Typical reporting lines, powers and authority

The Company Secretary is an officer of the company. This recognises the importance onwhich directors rely upon the Company Secretary and also brings with it the additionalresponsibility that the Company Secretary may be liable to breaches under the CA 2006,along with the directors. The Companys Secretarys signature is sometimes accepted as

an alternative to a directors, particularly where deeds can be executed by either twodirectors or one director and the company secretary. Common law has proved that theCompany Secretary has ostensible authority for binding the company with contracts ofan administrative nature. The Company Secretarys signature is, therefore, accepted in avariety of administrative transactions.

The Company Secretary is responsible to the board and should be accountable to itthrough the chairman on all matters relating to his core duties as an officer of thecompany. In connection with other non-core duties, the Company Secretary shouldreport to the chief executive or to any other director as chosen by the board. The

Company Secretarys remuneration and benefits should be decided by the board, or theremuneration committee of the board. This will prevent the Secretary from being


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exposed to the influence of a single director. In some larger organisations, the CompanySecretary has a functional reporting line to the companys General Counsel, the mostsenior in-house lawyer.

I trust the above information is helpful. Please do not hesitate to contact me if you haveany questions.

Assistant Secretary, Tasty Pasta plc

EXAMINERS COMMENTS

This was a popular question with candidates and was, on the whole, answered well.Most candidates were aware of the Companies Act 2006 provisions in respect of theoptional requirement for private companies to appoint and retain a Company Secretary.However, there was a tendency in part (c) for candidates to write all they know aboutthe duties of a Secretary. This was not requested in the question and candidates wouldhave lost considerable marks using this approach.

The scenarios included here are entirely fictional. Any resemblance of the information inthe scenarios to real persons or organisations, actual or perceived, is purely coincidental.

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