Monday 14 April 2025
Your weekly SQE Prep Quiz has arrived
Dear Subscriber,
I hope you had a great weekend! Please see below for the question, the answer to the previous question and associated resources. This is the web version of this newsletter. Next Monday the newsletter is taking a break, as it will be Easter Monday.
Question: Daniel and Priya set up a private limited company, SolarGen Ltd, to manufacture and sell solar-powered generators. They each invest £10,000 as shareholders and appoint themselves as directors. The company takes out a business loan of £100,000 from a bank to purchase equipment. A year later, SolarGen Ltd. fails to generate profits and becomes insolvent. The company is unable to repay the bank loan. The bank demands that Daniel and Priya personally repay the outstanding balance. Daniel and Priya seek legal advice, arguing that they are not personally liable for the company’s debts.
Which of the following legal principles best protects Daniel and Priya from personal liability for SolarGen Ltd’s debts?
1 The rule in Foss v Harbottle, which prevents shareholders from being sued for company losses.
2. The principle of ultra vires, which limits company liability to acts within its constitutional powers.
3. The doctrine of separate corporate personality established in Salomon v A Salomon & Co Ltd, which provides that the company is a separate legal entity responsible for its own debts.
4. The common law principle of caveat emptor, which limits liability in commercial transactions.
5. The veil of incorporation, which automatically makes directors immune from all legal claims relating to company operations.
Resource: Learn more about separate corporate personality and limited liability by watching this video. Pick up a copy of our free study planner here.
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Answer and feedback to last week’s question: Melissa is a director of EcoGlow Ltd, a company that develops sustainable lighting products. Without informing the board, Melissa sets up a separate company, GreenLux Ltd, offering similar products to the same client base as EcoGlow. She uses her knowledge of EcoGlow’s business strategy and supplier contacts to negotiate contracts for GreenLux, diverting several lucrative clients away from EcoGlow. When the board of EcoGlow discovers this, they accuse Melissa of breaching her duties as a director and seek legal advice on possible action. Which of the following director’s duties under the Companies Act 2006 has Melissa most clearly breached?
1. The duty to exercise reasonable care, skill and diligence under section 174.
2. The duty to avoid conflicts of interest under section 175.
3. The duty to promote the success of the company under section 172.
4. The duty to declare an interest in a proposed transaction or arrangement under section 177.
5. The duty to act within powers under section 171.
Correct Answer: 2. The duty to avoid conflicts of interest under section 175. Under section 175 of the Companies Act 2006, a director has a duty to avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This includes:
- Competing businesses.
- Diverting corporate opportunities.
- Using inside knowledge or company resources for personal gain.
In this scenario, Melissa set up a competing business (GreenLux Ltd) without disclosure and used EcoGlow’s confidential information and contacts to benefit her new venture. This is a clear conflict of interest, as her personal business directly competes with her company’s interests and undermines her loyalty to EcoGlow. Even if no actual loss had occurred, a conflict need only be possible for a breach to arise under s.175.
Why the Other Options Are Incorrect:
- Option 1 (s.174): While Melissa may also have failed to act with due skill and diligence, this isn’t the clearest breach in this case—it relates more to performance, not loyalty and conflicts.
- Option 3 (s.172): This duty to promote the company’s success was also arguably breached, but section 175 specifically addresses the issue of conflict of interest, which is more directly relevant.
- Option 4 (s.177): This applies to declaring interests in a proposed transaction with the company, which is not the case here—Melissa’s dealings were with a competing company she established.
- Option 5 (s.171): This duty relates to acting in accordance with the company’s constitution and within powers, not to conflicts of interest or competition.
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All the best
Dr Ioannis Glinavos
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