FLK1 · Multiple-choice practice

FLK1 Business Law — Question 41

Question

InnovateTech Ltd. is a rapidly growing technology company with three directors: Alice, Bob, and Charlie. Recently, Alice discovered a promising new technology during a business trip that could significantly benefit InnovateTech Ltd. Instead of informing the board, Alice decided to invest in the technology through her own private company, TechVentures Ltd., without disclosing her interest to InnovateTech Ltd. Meanwhile, Bob, as the finance director, has been approving large expenditures without seeking board approval, claiming that the expenses were necessary for urgent projects. Charlie, the third director, is unaware of both Alice’s and Bob’s actions. Subsequently, InnovateTech Ltd. faces financial difficulties due to Bob’s unapproved expenditures and misses out on the new technology opportunity because Alice’s private company secured the investment. Charlie, upon discovering these issues, seeks to initiate legal action. Which of the following best describes legal tools to protest the behaviour of Alice and Bob?

Alice has breached her duty to avoid conflicts of interest and her duty to act within powers, while Bob has breached his duty to exercise reasonable care, skill, and diligence.
Alice has breached her duty to promote the success of the company and her duty to exercise independent judgment, while Bob has breached his duty to avoid conflicts of interest.
Alice has breached her duty to avoid conflicts of interest and her duty to disclose any interest in a proposed transaction or arrangement, while Bob has breached his duty to act within powers and his duty to exercise reasonable care, skill, and diligence.
Alice has breached her duty to exercise reasonable care, skill, and diligence and her duty to act within powers, while Bob has breached his duty to promote the success of the company.
Alice has breached her duty to avoid conflicts of interest and her duty to promote the success of the company, while Bob has breached his duty to exercise independent judgment.

Answer and explanation

Correct answer: C. Alice has breached her duty to avoid conflicts of interest and her duty to disclose any interest in a proposed transaction or arrangement, while Bob has breached his duty to act within powers and his duty to exercise reasonable care, skill, and diligence.

Alice has breached her duty to avoid conflicts of interest and her duty to disclose any interest in a proposed transaction or arrangement, while Bob has breached his duty to act within powers and his duty to exercise reasonable care, skill, and diligence. Alice’s breaches: Duty to avoid conflicts of interest (Section 175 of the Companies Act 2006): Alice failed to disclose her interest in the new technology investment to the board of InnovateTech Ltd. and instead invested through her own private company, TechVentures Ltd. This creates a conflict of interest, as she took advantage of a business opportunity that could have benefited InnovateTech Ltd. Duty to disclose any interest in a proposed transaction or arrangement (Section 177 of the Companies Act 2006): Alice was required to disclose her interest in the new technology investment to the board, which she failed to do. Bob’s breaches: – Duty to act within powers (Section 171 of the Companies Act 2006): Bob approved large expenditures without seeking board approval, which is likely outside the scope of his authority as finance director. Duty to exercise reasonable care, skill, and diligence (Section 174 of the Companies Act 2006): Bob failed to exercise the necessary care, skill, and diligence by approving significant expenditures without proper authorization, contributing to the financial difficulties faced by InnovateTech Ltd. These breaches highlight the importance of directors adhering to their duties to ensure the proper governance and success of the company. Charlie, as a fellow director, can seek legal action against Alice and Bob for their respective breaches of these duties.

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