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Part 10: Company Directors

277.This Part replaces Part 10 of the 1985 Act (enforcement of fair dealing by directors), the provisions relating to directors in Part 9 of that Act and the provisions relating to confidentiality orders in Part 25 of that Act. It also introduces a statutory statement of directors’ general duties to the company.

Who is a director?

278.Section 250 defines a director as including any person occupying the position of director, by whatever name called. This is the same as the definition contained in section 741(1) of the 1985 Act. The Act does not attempt a more detailed definition of a director because it is important to ensure that the term is applied to anybody who exercises real power within the company, particularly in relation to decision taking. The term «director» therefore includes:

an executive director who has been properly appointed by the company;

a non-executive director who has been properly appointed by the company;

a de facto director (that is, a person who has assumed the status and functions of a company director even though he has not been properly appointed).

279.A «shadow director» is defined by section 251 as «a person in accordance with whose directions or instructions the directors of the company are accustomed to act». The section provides that a person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity. This definition is the same as the definition contained in section 741(2) of the 1985 Act.

Powers of directors

280.This Part of the Act does not generally directly give powers to the directors, but, under the draft model articles of association for private companies limited by shares, the directors’ functions are:

to manage the company’s business; and

to exercise all the powers of the company.

Chapter 1: Appointment and Removal of Directors

Section 154: Companies required to have directors

281.This section replaces section 282 of the 1985 Act. It distinguishes between private and public companies. It retains the requirement for a private company to have at least one director and requires all public companies to have at least two. There will no longer be an exception for public companies registered before 1st November 1929 (or before 1st January 1933 in Northern Ireland).

Section 155: Companies required to have at least one director who is a natural person

282.This section is a new provision. It introduces a requirement that every company have at least one director who is a natural person, ie an individual. Subject to this requirement being satisfied, any legal person, including one that is a company or a firm, can be a director but one company cannot be the sole director of another company. Subsection (2) provides that the requirement that the director be a natural person is met if the director is a corporation sole (for example, the Archbishop of Canterbury) or someone appointed on the basis of some other appointment that they hold.

Section 156: Direction requiring company to make appointment

283.This section is a new provision, enabling enforcement of the existing requirement for a private company to have at least one director and a public company to have at least two directors and of the new requirement for every company to have at least one director who is an individual. Where it appears to the Secretary of State that any of these requirements is not met, the Secretary of State will be able to direct the company to comply by issuing a notice. It will be an offence not to comply.

Section 157: Minimum age for appointment as director

284.This section is a new provision. It introduces a minimum age of 16 for a natural person to be a director. Subsection (2) provides that prohibition will not prevent the appointment of a younger person provided it is not to take effect until that person is 16. Subsection (3) provides that the age limit applies even if the director’s appointment is a consequence of some other appointment. Subsection (5) provides that this prohibition on under-age directors does not provide protection from criminal prosecution or civil liability if he or she were to act as director, i.e. as a de facto director, or if the company’s directors usually act on that young person’s instructions.

Section 158: Power to provide for exceptions from minimum age requirement

285.This section is a new provision. It provides for an exception from the prohibition in section 157 on anyone under 16 being appointed a director of a company. It provides a power for the Secretary of State to make regulations specifying circumstances in which a younger person may be a director. The regulations may differ for different parts of the UK.

Section 159: Existing under-age directors

286.This section is a new transitional provision. Subsections (1) and (2) provide that where a person under 16 has been appointed as director (or holds the office of director by virtue of another office or is a corporation sole) prior to the prohibition on under age directors coming into force, that person will cease to be a director when the prohibition in section 157 comes into force. Subsection (3) makes it the company’s responsibility to amend its register of directors accordingly but the company is not required to notify the registrar of the change. Subsection (4) gives the registrar power to amend the register without a notification by the company of the director’s removal but rather on the basis of information already held (i.e. the date of birth as provided when the appointment was notified).

Section 160: Appointment of directors of public company to be voted on individually.

287.This restates section 292 of the 1985 Act: the appointment of each proposed director of a public company must be voted on individually unless there is unanimous agreement to a block resolution. Without such consent, any appointment of a director that is not voted on individually is void. This ensures that members can express their disapproval of any particular director without having to reject the entire board.

Section 161: Validity of acts of directors

288.This section, which replaces section 285 of the 1985 Act, provides that a director’s actions are valid even if his or her appointment is subsequently found to have been defective or void.

Section 162: Register of directors

289.This section replaces part of section 288 of the 1985 Act. It imposes on every company a requirement to keep a register of its directors (secretaries are dealt with in Part 12). This register need not contain particulars of shadow directors.

290.This section requires the register to be kept available for inspection either at the company’s registered office or at a place specified in regulations made under section 1136. It must be available for inspection by members (without charge) or the public (for a prescribed fee, set under powers provided under section 1137). Refusal to permit inspection is an offence for which every officer in default (including a shadow director) can be liable. In addition, the court may compel immediate inspection of the register if the company has refused.

Section 163: Particulars of directors to be registered: individuals

291.This section replaces section 289 of the 1985 Act so far as it applies to individuals. It specifies the particulars that must be entered in the register of directors for each director who is an individual (as opposed to a company or similar entity). The most significant change is the requirement for companies to provide a service address for a director rather than, as now, the director’s usual residential address. A director may give the company’s registered office as his or her service address; the service address may also be the same as the director’s residential address – but this will not be apparent from the public record. In addition, in fulfilment of a Government commitment given in March 1998, the particulars no longer include details of other directorships held. There are also changes to the requirement to provide the director’s name. The requirement is now to include any name by which the individual was formerly known for business purposes. As recommended by the CLR (Final Report, paragraph 11.38), there is no longer an exception for a married woman’s former name. However the section retains a protective provision relating to the former names of peers.

Section 164: Particulars of directors to be registered: corporate directors and firms

292.This section replaces section 289(1)(b) of the 1985 Act. It retains the requirement for the corporate or firm name and the registered or principal office to be recorded where the director is either a body corporate or a firm that is a legal person under the law by which it is governed. In addition, as recommended by the CLR (Final Report, paragraph 11.38), it requires for EEA companies the register where the company is registered and its registration number; for all others, particulars of the legal form of the company or firm, the law by which it is governed, and, if applicable, where it is registered and its registration number.

Section 165: Register of directors’ residential addresses

293.This section is a new provision. It requires companies to keep a register of the usual residential addresses of directors who are individuals. Provided that a director’s service address is not the company’s registered office, if his/her residential address is the same as his/her service address, then the register need only contain an entry making that clear. This register is not to be open to public inspection, but can be used in accordance with Chapter 8 of this Part.

Section 166: Particulars of directors to be registered: power to make regulations

294.This section is a new provision. It provides power for the Secretary of State to make regulations that add or remove items from the particulars that have to be entered in a company’s register of directors and register of directors’ residential addresses.

Section 167: Duty to notify registrar of changes

295.This section replaces section 288(2) of the 1985 Act insofar as it applies to directors. It retains the requirement that the appointment of a director, or a director’s ceasing to hold office, and any change in an existing director’s particulars, be notified to the registrar within 14 days. This requirement does not extend to shadow directors. Default is an offence. This section also requires a notice of appointment to be accompanied by the appointee’s consent. This provision ensures that the public record is kept up to date. There is also a requirement to notify the registrar of changes to information in the register of directors’ residential addresses (but this information is not to be open to public inspection at Companies House).

Section 168: Resolution to remove director

296.This section replaces section 303 of the 1985 Act. Subsection (1) provides that an ordinary resolution is sufficient to remove a director, but requires that it be at a meeting so as to ensure the director’s right to be heard.

Section 169: Director’s right to protest removal

297.This section replaces section 304 of the 1985 Act. The only change is to be found in subsection (5); the court need no longer be satisfied that the rights conferred by the section are being abused to secure needless publicity for defamatory matter, so long as it is satisfied that they are being abused

Chapter 2: General Duties of Directors

Sections 170 to 181: General comments

298.The general duties form a code of conduct, which sets out how directors are expected to behave; it does not tell them in terms what to do. More particularly, the duties address:

the possibility that a director may put his own or other interests ahead of those of the company;

the possibility that he may be negligent.

299.The duties are derived from equitable and common law rules, and are not at the moment written down in statute.

300.The Law Commission and the Scottish Law Commission recommended that there should be a statutory statement of a director’s main fiduciary duties and his duty of care and skill in their joint report Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties. The CLR’s main recommendations in respect of directors’ general duties are summarised in chapter 3 of the Final Report.

301.The CLR recommended that there should be a statutory statement of directors’ general duties, and that this should, with two exceptions, described in the next paragraph, be a codification of the current law. In particular they wanted:

to provide greater clarity on what is expected of directors and make the law more accessible. In particular, they sought to address the key question «in whose interests should companies be run?» in a way which reflects modern business needs and wider expectations of responsible business behaviour;

to make development of the law in this area more predictable (but without hindering development of the law by the courts);

to correct what the CLR saw as defects in the present duties relating to conflicts of interest.

The Government has accepted these recommendations.

302.There are two areas, both relating to the regulation of conflicts of interest, where the statutory statement departs from the current law:

under section 175, transactions or arrangements with the company do not have to be authorised by either the members or by the board; instead interests in transactions or arrangements with the company must be declared under section 177 (in the case of proposed transactions) or under section 182 (in the case of existing transactions) unless an exception applies under those sections;

section 175 also permits board authorisation of most conflicts of interest arising from third party dealings by the director (e.g. personal exploitation of corporate resources and opportunities). Such authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors. Board authorisation of conflicts of interest will be the default position for private companies, but public companies will need to make provision in their constitutions to permit this. Board authorisation is not permitted in respect of the acceptance of benefits from third parties (section 176).

303.Both reforms implement recommendations of the CLR, which noted that the basic principles in the current law relating to directors’ conflicts of interest are very strict:

they noted that in practice most companies permit a director to have an interest in a proposed transaction or arrangement with the company, provided that the interest is disclosed to his fellow directors. The statutory statement therefore reflects the current position in most companies;

they also took the view that the current strict rule relating to conflicts of interest in respect of personal exploitation of corporate opportunities fettered entrepreneurial and business start-up activity by existing company directors. The statutory statement therefore provides for board authorisation of such conflicts.

304.These reforms are modified for charitable companies in England and Wales and Northern Ireland by section 181.

Codification of common law rules and equitable principles

305.Codification is not a matter of transposing wording taken from judgments into legislative propositions. Judgments are, of necessity, directed at particular cases. Even when they appear to state general principles, they will rarely be exhaustive. They will be the application of (perhaps unstated) general principles to particular facts. In the company law field, the principles being applied will frequently be taken from other areas, in particular trusts and agency. It is important that these connections are not lost and that company law may continue to reflect developments elsewhere. Frequently the courts may formulate the same idea in different ways. In contrast legislation is formal. It is not easy to reconcile these two approaches but the draft sections seek to balance precision against the need for continued flexibility and development. In particular:

subsection (3) of section 170 provides that the statutory duties are based on, and have effect in place of, certain common law rules and equitable principles;

subsection (4) of section 170 provides that the general duties should be interpreted and applied in the same way as common law rules and equitable principles. The courts should interpret and develop the general duties in a way that reflects the nature of the rules and principles they replace;

subsection (4) of section 170 also provides when interpreting and applying the statutory duties, regard should be had to the common law rules and equitable principles which the general duties replace; thus developments in the law of trusts and agency should be reflected in the interpretation and application of the duties;

section 178 provides that the civil consequences of breach (or threatened breach) of the statutory duties are the same as would apply if the corresponding common law rule or equitable principle applied. It also makes clear that the statutory duties are to be regarded as fiduciary, with the exception of the duty to exercise reasonable care skill and diligence which is not under the present law regarded as a fiduciary duty.

306.The statutory duties do not cover all the duties that a director may owe to the company. Many duties are imposed elsewhere in legislation, such as the duty to file accounts and reports with the registrar of companies (section 441). Other duties remain uncodified, such as any duty to consider the interests of creditors in times of threatened insolvency.

Duties owed to the company

307.Section 170(1) makes it clear that, as in the existing law, the general duties are owed by a director to the company. It follows that, as now, only the company can enforce them. Part 11 (derivative claims and actions by members) describes the mechanism whereby members may be able to enforce the duties on behalf of the company.

Who are the duties owed by?

308.The duties are owed by every person who is a director of a company (as defined in section 250). They are therefore owed by a de facto director in the same way and to the same extent that they are owed by a properly appointed director.

309.Certain aspects of the duty to avoid conflicts of interest and the duty not to accept benefits from third parties continue to apply even when a person ceases to be a director; this is necessary to ensure that a director cannot, for example, exploit an opportunity of which he became aware while managing the company’s business without the necessary consent simply by resigning his position as director. The closing words of section 170(2) provide that these duties apply to a former director subject to any necessary adaptations. This is to reflect the fact that a former director is not in the same legal position as an actual director.

310.The statutory duties apply to shadow directors where, and to the extent that, the common law rules or equitable principles which they replace so apply (section 170(5)). This means that where a common law rule or equitable principle applies to a shadow director, the statutory duty replacing that common law rule or equitable principle will apply to the shadow director (in place of that rule or principle). Where the rule or principle does not apply to a shadow director, the statutory duty replacing that rule or principle will not apply either.

The relationship between the duties

311.Many of the general duties will frequently overlap. Taking a bribe from a third party would, for example, clearly fall within the duty not to accept benefits from third parties (section 176) but could also, depending on the facts, be characterised as a failure to promote the success of the company for the benefit of its members (section 172) or as an aspect of failing to exercise independent judgment (section 173).

312.The effect of the duties is cumulative, so that it is necessary to comply with every duty that applies in any given case. This principle is stated in section 179. One exception relates to the duty to avoid conflicts of interest (section 175). This particular duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company. In such cases the duty to declare interests in proposed transactions or arrangements (section 177) or the requirement to declare interests in existing transactions or arrangements (section 182) will apply instead. Section 181 modifies these provisions for charitable companies in England and Wales and Northern Ireland.

313.The cumulative effect of the duties means that where more than one duty applies, the director must comply with each applicable duty, and the duties must be read in this context. So, for example, the duty to promote the success of the company will not authorise the director to breach his duty to act within his powers, even if he considers that it would be most likely to promote the success of the company.

314.As well as complying with all the duties, the directors must continue to comply with all other applicable laws. The duties do not require or authorise a director to breach any other prohibition or requirement imposed on him by law.

Relationship between the duties and the company’s constitution

315.Under section 171 a director must act in accordance with the company’s constitution.

316.Companies may, through their articles, go further than the statutory duties by placing more onerous requirements on their directors (e.g. by requiring shareholder authorisation of the remuneration of the directors). The articles may not dilute the duties except to the extent that this is permitted by the following sections:

section 173 provides that a director will not be in breach of the duty to exercise independent judgment if he has acted in a way that is authorised by the constitution;

section 175 permits authorisation of some conflicts of interest by independent directors, subject to the constitution;

subsection (4)(a) of section 180 preserves any rule of law enabling the company to give authority for anything that would otherwise be a breach of duty;

subsection (4)(b) of section 180 provides that a director will not be in breach of duty if he acts in accordance with any provisions in the company’s articles for dealing with conflicts of interest;

section 232 places restrictions on the provisions that may be included in the company’s articles. But nothing in that section prevents companies from including in their articles any such provisions as are currently lawful for dealing with conflicts of interest.

317.The company’s constitution may also set out the purposes of the company, especially in the case of an altruistic company which has purposes other than the benefit of the company’s members. It is very important that directors understand the purposes of the company, so that they are able to comply with their duty to promote the success of the company in section 172.

Relationship between the duties and the detailed rules requiring member approval of conflicts of interest

318.Under the provisions in Chapter 4 of this Part, the directors must sometimes obtain prior shareholder approval for the following types of transaction involving a director (or, in some cases, a person connected to a director): long-term service contracts; substantial property transactions; loans, quasi-loans and credit transactions; and payments for loss of office.

319.Section 180 provides that:

compliance with the general duties does not remove the need for member approval of such transactions (subsection (3));

(subject to the exception set out in the bullet point below) the general duties apply even if the transaction also falls within Chapter 4 (because it is a long-term service contract, substantial property transaction, loan, quasi-loan, credit transaction or payment for loss of office). So, for example, the directors should only approve a loan to a director if they consider that it would promote the success of the company. This is so, even if the loan does not require the approval of members under Chapter 4 because it falls within a relevant exception, such as the exception for expenditure on company business in section 204;

if the transaction falls within Chapter 4 (because it is a long-term service contract, substantial property transaction, loan, quasi-loan, credit transaction or payment for loss of office) and approval of the members is obtained to the transaction in accordance with that Chapter, or an exception applies, so that approval is not necessary under that Chapter, then the director does not need to comply with the duty to avoid conflicts of interest (section 175) or the duty not to accept benefits from third parties (section 176) in respect of that transaction. All other applicable duties will still apply. For example, a director would not be acting in breach of the duty to avoid conflicts of interests if he failed to obtain authorisation from the directors or the members for a loan from the company in respect of legal defence costs. Section 181 modifies this provision for charitable companies in England and Wales and Northern Ireland.

Relationship between the duties and the general law

320.Section 180(5) provides that the general duties have effect notwithstanding any enactment or rule of law except where there is an express or implied exception to this rule. For example, section 247 provides that directors may make provision for employees on the cessation or transfer of a company’s business even if this would otherwise constitute a breach of the general duty to promote the success of the company.

Consequences of breach

321.Section 178 preserves the existing civil consequences of breach (or threatened breach) of any of the general duties. The remedies for breach of the general duties will be exactly the same as those that are currently available following a breach of the equitable principles and common law rules that the general duties replace.

322.Subsection (2) of that section makes it clear that the duties are enforceable in the same way as any other fiduciary duty owed to a company by its directors (except for the duty to exercise reasonable care, skill and diligence, which is not considered to be a fiduciary duty). In the case of fiduciary duties the consequences of breach may include:

damages or compensation where the company has suffered loss;

restoration of the company’s property;

an account of profits made by the director; and

rescission of a contract where the director failed to disclose an interest.

Commentary on Individual Duties

Section 171: Duty to act within powers

323.This duty codifies the current principle of law under which a director should exercise his powers in accordance with the terms on which they were granted, and do so for a proper purpose. What constitutes a proper purpose must be ascertained in the context of the specific situation under consideration.

324.This duty codifies the director’s duty to comply with the company’s constitution. The constitution is defined for the purpose of the general duties in section 257. As well as the company’s articles of association it includes:

decisions taken in accordance with the company’s articles; and

other decisions taken by the members (or a class of them) if they are to be treated by virtue of any enactment or rule of law as decisions of the company, for example a decision taken by informal unanimous consent of all the members.

Section 172: Duty to promote the success of the company

325.This duty codifies the current law and enshrines in statute what is commonly referred to as the principle of «enlightened shareholder value». The duty requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and, in doing so, have regard to the factors listed.

326.This list is not exhaustive, but highlights areas of particular importance which reflect wider expectations of responsible business behaviour, such as the interests of the company’s employees and the impact of the company’s operations on the community and the environment.

327.The decision as to what will promote the success of the company, and what constitutes such success, is one for the director’s good faith judgment. This ensures that business decisions on, for example, strategy and tactics are for the directors, and not subject to decision by the courts, subject to good faith.

328.In having regard to the factors listed, the duty to exercise reasonable care, skill and diligence (section 174) will apply. It will not be sufficient to pay lip service to the factors, and, in many cases the directors will need to take action to comply with this aspect of the duty. At the same time, the duty does not require a director to do more than good faith and the duty to exercise reasonable care, skill and diligence would require, nor would it be possible for a director acting in good faith to be held liable for a process failure which would not have affected his decision as to which course of action would best promote the success of the company.

329.In requiring directors to have regard to the interests of employees, this provision replaces section 309(1) of the 1985 Act.

330.Subsection (2) addresses the question of altruistic, or partly altruistic, companies. Examples of such companies include charitable companies and community interest companies, but it is possible for any company to have «unselfish» objectives which prevail over the «selfish» interests of members. Where the purpose of the company is something other than the benefit of its members, the directors must act in the way they consider, in good faith, would be most likely to achieve that purpose. It is a matter for the good faith judgment of the director as to what those purposes are, and, where the company is partially for the benefit of its members and partly for other purposes, the extent to which those other purposes apply in place of the benefit of the members.

331.Subsection (3) recognises that the duty to promote the success of the company is displaced when the company is insolvent. Section 214 of the Insolvency Act 1986 provides a mechanism under which the liquidator can require the directors to contribute towards the funds available to creditors in an insolvent winding up, where they ought to have recognised that the company had no reasonable prospect of avoiding insolvent liquidation and then failed to take all reasonable steps to minimise the loss to creditors.

332.It has been suggested that the duty to promote the success of the company may also be modified by an obligation to have regard to the interests of creditors as the company nears insolvency. Subsection (3)will leave the law to develop in this area.

Section 173: Duty to exercise independent judgment

333.This duty codifies the current principle of law under which directors must exercise their powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise (unless authorised by or under the constitution to do so).

334.The section provides that directors must not fetter the future exercise of their discretion unless they are acting:

a)in accordance with an agreement which has been duly entered into by the company; or

b)in a way authorised by the company’s constitution.

335.The duty does not confer a power on the directors to delegate, nor does it prevent a director from exercising a power to delegate conferred by the company’s constitution provided that its exercise is in accordance with the company’s constitution. Under the draft model articles of association for private companies limited by shares, the directors may delegate their functions in accordance with the articles.

Section 174: Duty to exercise reasonable care, skill and diligence

336.This duty codifies the director’s duty to exercise reasonable, care, skill and diligence. Traditionally, the courts did not require directors to exhibit a greater degree of skill than may reasonably be expected from a person with their knowledge and experience (a subjective test). More recently, the courts have said that the common law standard now mirrors the tests laid down in section 214 of the Insolvency Act 1986, which includes an objective assessment of a director’s conduct. This section is modelled on that section.

337.The section provides that a director owes a duty to his company to exercise the same standard of care, skill and diligence that would be exercised by a reasonably diligent person with:

a)the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as the director in relation to that company (an objective test); and

b)the general knowledge, skill and experience that the director actually has (a subjective test).

Section 175: Duty to avoid conflicts of interest

338.This duty replaces the no-conflict rule applying to directors. Under the current no-conflict rule, certain consequences flow if directors place themselves in a position where their personal interests or duties to other persons are liable to conflict with their duties to the company, unless the company gives its consent. A conflict of interest may, in particular, arise when a director makes personal use of information, property or opportunities belonging to the company or when a director enters into a contract with his company. Conflicts of interest may also arise whenever a director makes a profit in the course of being a director, in the matter of his directorship, without the knowledge and consent of his company.

339.This duty covers all conflicts, actual and potential, between the interests of the director and the interests of the company. This includes conflicts relating to the exploitation of the company’s property, information or opportunity for personal purposes. The only conflicts not covered by this duty, are those relating to transactions or arrangements with the company (interests in transactions or arrangements with the company must be declared under section 177 in the case of proposed transactions or under section 182 in the case of existing transactions unless an exception applies under those sections).

340.Section 180(4) preserves any current ability of the members of a company to authorise conflicts that would otherwise be a breach of this duty.

341.Under subsections (4) to (6) the duty is also not infringed if:

the situation cannot reasonably be regarded as likely to give rise to a conflict of interest;

in the case of a private company, unless its constitution prevents this, authorisation has been given by directors who are genuinely independent (in the sense that they have no direct or indirect interest in the transaction);

similarly, in the case of a public company, but only if its constitution expressly permits this, authorisation has been given by the independent directors.

342.The present law is that in all cases, conflicts of interest must be authorised by the members of the company, unless some alternative procedure is properly provided. The CLR were concerned that this strict requirement might stifle entrepreneurial activity; and therefore recommended that, in the case of a private company, it should be possible for conflicts to be authorised by independent directors unless the company’s constitution prevents this.

343.Under subsection (6), board authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors: the votes of the conflicted directors in favour of the decision are ignored and the conflicted directors are not counted in the quorum.

Section 176: Duty not to accept benefits from third parties

344.This section codifies the rule prohibiting the exploitation of the position of director for personal benefit. This duty prohibits the acceptance of benefits (including bribes). The acceptance of a benefit giving rise to an actual or potential conflict of interest will fall within the duty to avoid conflicts of interest (section 175) as well as this duty. This specific duty dealing with benefits from third parties is not subject to any provision for board authorisation.

345.Any current ability of the members of a company to authorise the acceptance of benefits which would otherwise be a breach of this duty is preserved by section 180(4).

346.The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Benefits conferred by the company (and its holding company or subsidiaries) do not fall within this duty.

Section 177: Duty to declare interest in proposed transaction or arrangement

347.The equitable rule that directors may not have interests in transactions with the company unless the interest has been authorised by the members is replaced by this duty. This section requires a director to disclose any interest, direct or indirect, that he has in relation to a proposed transaction or arrangement with the company. The director does not need to be a party to the transaction for the duty to apply. An interest of another person in a contract with the company may require the director to make a disclosure under this duty, if that other person’s interest amounts to a direct or indirect interest on the part of the director.

348.Under the current equitable rule, shareholder approval is required for transactions between a company and a director. Company articles often modify the equitable rule, requiring disclosure of the conflict instead. As proposed by the CLR, shareholder approval for the transaction is not a requirement of the statutory duty. The members of the company may however still impose requirements for shareholder approval in the articles.

349.The duty requires directors to disclose their interest in any transaction before the company enters into the transaction (subsection (4)). The duty does not impose any rules on how the disclosure of interest must be made, but subsection (2) allows the disclosure to be made by written notice, general notice or disclosure at a meeting of the directors.

350.Disclosure to the members is not sufficient. The director must declare the nature and extent of his interest to the other directors. It is not enough for the director to merely state that he has an interest.

351.If after he has disclosed his interest, he becomes aware that the facts have changed, or for some other reason the earlier disclosure is no longer accurate or complete, the director must make a further declaration, correcting the earlier one (subsection (3)). However, this is only necessary if the company has not yet entered into the transaction or arrangement at the time the director becomes aware of the inaccuracy or incompleteness of the earlier declaration (or ought reasonably to have become so aware).

352.As the duty requires disclosure to be made to the other directors, no disclosure is required where the company has only one director. There is no need to disclose anything the other directors already know about or ought reasonably to have known (subsection (6)(b)). A director will breach the duty if he fails to declare something he ought reasonably to have known, but the duty does not otherwise require a director to declare anything he does not know. Subsection (6)(c) makes special provision for service contracts that are considered by a meeting of the directors or a committee appointed for the purpose (such as a remuneration committee).

353.No declaration of interest is required if the director’s interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest (subsection (6)(a)). Currently regulation 85 of Table A imposes a materiality test.

354.Conflicted directors may, subject to the company’s articles of association, participate in decision-taking relating to such transactions with the company.

Section 181: Modification of provisions in relation to charitable companies

355.This section reverses certain relaxations made to the no-conflict rule as it applies to the directors of charitable companies in England and Wales and Northern Ireland.

356.Subsection (2)(a) replaces section 175(3) which excludes conflicts of interest arising out of transactions or arrangements with the company. The replacement excludes such conflicts of interest from the duty only if or to the extent that the charitable company’s articles so allow. The articles must describe the transactions or arrangements which are to be so excluded from the duty.

357.Subsection (2)(b) replaces section 175(5) which allows authorisation for conflicts of interest to be given by the directors. The replacement only allows authorisation to be given by the directors where the charitable company’s constitution expressly allows them to do so.

358.Subsection (3) restricts the application of section 180(2)(b) which disapplies sections 175 and 176 in relation to those matters excepted from the requirements for member approval under Chapter 4. Section 180(2)(b) is restricted so that it only applies if or to the extent that the charitable company’s articles allow the duties in sections 175 and 176 to be disapplied. The articles must describe the transactions or arrangements which are to be so excluded from those duties.

359.Subsection (4) amends the Charities Act 1993 to give the Charity Commission the power to authorise acts that would otherwise be in breach of the general duties. This is necessary to preserve the current power of the Charity Commissioners to do so, in the light of the statutory statement of the general duties.

Chapter 3: Declaration of Interest in Existing Transaction Or Arrangement

Section 182: Declaration of interest in existing transaction or arrangement

360.This section requires a director to declare the nature and extent of any direct or indirect interest that he has in any transaction or arrangement entered into by the company. It replaces the provision made by section 317 of the 1985 Act.

361.This chapter differs from the provisions of that section in a number of important respects. The main points are summarised below.

What should be declared?

362.Directors are required to declare any interest, direct or indirect, that they have in an existing transaction or arrangement entered into by the company. This section only applies to transactions or arrangements already entered into by the company. Section 177 (duty to declare interests) applies in the case of proposed transactions or arrangements with the company.

363.The director does not need to be a party to the transaction with the company in order for a declaration to be required under this section. For example, where the director’s spouse enters into a transaction with the company that may (but need not necessarily) give rise to an indirect interest on the part of the director in that transaction.

364.The declaration must be of the nature and extent of the director’s direct or indirect interest.

365.If the director has declared his interest in accordance with section 177 at the time the transaction was proposed, and before it was entered into by the company, the director does not need to repeat that declaration once the transaction becomes an existing transaction to which this section applies (subsection (1)).

366.Furthermore, a director need not declare any interest:

that cannot reasonably be regarded as likely to give rise to a conflict of interest;

that the other directors already know about, or ought reasonably to know about; or

that concerns the terms of his service contract, considered (or to be considered) by a meeting of directors or by the relevant committee of directors.

367.A director is regarded as failing to make the declarations required by this section if he fails to declare something that he ought reasonably to have known. But the director is not otherwise expected by this section to declare things he does not know (subsection (5)).

When should the declaration be made?

368.The declaration should be made as soon as is reasonably practicable. But even if the declaration is not made as soon as it should have been, it must still be made (subsection (4)). If after a declaration has been made the director’s interest in the transaction or arrangement changes, or the director realises that his interests were not as originally declared, the director must make another declaration of interest, correcting or updating the earlier one (subsection (3)).

How should the declaration be made?

369.The declaration of interest must be made to the other directors using one of the following three methods:-

at a meeting of the directors; or

by notice in writing (in accordance with the requirements of section 184); or

by general notice (in accordance with the requirements of section 185).

Section 183: Offence of failure to declare interest

370.This section restates section 317(7) of the 1985 Act. A director who fails to comply with the requirements of section 182 commits an offence. On conviction on indictment the maximum liability is an unlimited fine. On summary conviction the fine must not exceed the statutory maximum (currently £5,000). This section does not affect the validity of the transaction or impose any other civil consequences for a failure to make the declarations of interest required by section 182.

Section 184: Declaration made by notice in writing

371.This section provides a new written procedure for the declarations of interest required by section 182. A written notice declaring the nature and extent of the director’s interest must be sent to all the other directors. It may be sent in hard copy form or, if the recipient agrees, in electronic form. It may be posted, delivered by hand or, if the recipient agrees, by electronic means. When this is done, the notice is treated as forming part of the proceedings of the next meeting of the directors, and so should form part of the minutes of that meeting (subsection (5)).

Section 185: General notice treated as sufficient declaration

372.This section replaces section 317(3) and (4) of the 1985 Act. It enables a director to give a general notice of his interests. A general notice is a declaration that the director is interested in another body corporate or firm, or that the director is connected with another person. If the company enters into a contract with the body corporate, firm or other person named in the general notice, the director does not need to declare any direct or indirect interest that he has in that contract arising as a result of his interest in the body corporate or firm named in the general notice or arising as a result of his connection to the person named in the general notice.

373.In order to be effective, the general notice must state the nature and extent of the director’s interest in the body corporate or firm (for example, sole shareholder of the company) or the nature of his connection with the person (for example, spouse or other connected person as defined in section 253). The requirement to disclose the extent of the interest implements a recommendation of the Law Commissions.

Section 186: Declaration of interest in case of company with sole director

374.This is a new provision. Where a company has only one director, it is not possible for the director to declare his interests to the other directors, because there are no other directors. Therefore, a sole director does not need to comply with section 182 (declaration of interest in existing transaction or arrangement).

375.The section makes special provision where the company has only one director, when it should in fact have more than one director (for example, because it is a public company). In such a case, the sole director must record in writing the nature and extent of his interest in any transaction or arrangement that has been entered into by the company.

Section 187: Declaration of interest in existing transaction by shadow director

376.This section replaces section 317(8) of the 1985 Act. It extends this Chapter to shadow directors, so that a shadow director must also declare the nature and extent of his interest in any transaction or arrangement that has been entered into by the company, in accordance with section 182. The declaration must be made by notice in writing (section 184) or by general notice (section 185).

377.The declaration is not made at a meeting of the directors, as this is not appropriate in the case of a shadow director. If the shadow director makes the declaration by general notice, that notice must be given in accordance with the notice in writing procedure set out in section 184. This means that a general notice given by a shadow director must comply with both section 184 and the first three subsections of section 185.

378.Otherwise, apart from section 186 (declaration of interest in case of company with sole director), which is not relevant to a shadow director, all the other provisions of this chapter apply to a shadow director, including the exemptions in section 182.

General Introduction to Chapters 4 and 5

379.These Chapters contains several provisions designed to deal with particular situations in which a director has a conflict of interest. They replace provisions of Part 10 of the 1985 Act, but with a number of changes. The aim of the changes is:

to improve accessibility and consistency. The Law Commissions commented that Part 10 of the 1985 Act «is widely perceived as being extremely detailed, fragmented, excessive, and in some respects, defective, regulation of directors»; and

to implement various recommendations of the Law Commissions and the CLR (see in particular section B of the Law Commissions’ joint report Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties, annex C of Developing the Framework, chapter 4 of Completing the Structure and chapter 6 of the Final Report).

380.Provisions regulating directors’ conflicts of interest fall into two main categories:

requirements for disclosure to members;

requirements for member approval.

381.The four types of transaction requiring the approval of members (long-term service contracts; substantial property transactions; loans, quasi-loans and credit transactions; and payments for loss of office) have been brought together within Chapter 4.

382.Provision for disclosure to members in respect of directors’ service contracts is contained in Chapter 5.

383.On the other hand, the requirements in Part 10 of the 1985 Act to disclose, and maintain a register of, share dealings by directors and their families are repealed (see section 1177).

Chapter 4: Transactions With Directors Requiring Approval of Members

Structure

384.This Chapter sets out requirements for member approval in relation to four different types of transaction by a company:

long-term service contracts;

substantial property transactions;

loans, quasi-loans and credit transactions;

payments for loss of office.

385.The rules relating to each type of transaction tend to adopt the following structure: they begin with the rule requiring member approval, followed by exceptions to that rule and finally the consequences of breaching that rule.

Alignment of provisions

386.The provisions of this Chapter have been aligned wherever appropriate so as to achieve greater consistency of approach. Particular examples of alignment are mentioned below.

Criminal penalties

387.This Chapter no longer imposes any criminal penalties for a failure to comply with its requirements.

Civil remedies

388.The civil consequences of a failure to comply with the requirements for member approval of substantial property transactions and loans, quasi-loans and credit transactions have been aligned.

Approval by holding company

389.This Chapter applies to long-term service contracts, substantial property transactions, loans etc and payments for loss of office entered into by a company and involving either a director of the company or a director of the company’s holding company. In the latter case, the transaction must be approved by both the company and the holding company (unless an exception applies).

Transactions between a company and the director of a fellow subsidiary

390.This Chapter does not normally apply to transactions entered into by a company that is neither the company of which the person is a director nor a subsidiary of the company of which the person is a director. The two exceptions are section 218 (payment for loss of office in connection with transfer of undertaking) and section 219 (payment for loss of office in connection with share transfer), where member approval is required for such a payment by any person to a director.

Exception for wholly-owned subsidiary

391.Approval is never required under this Chapter on the part of the member of a wholly-owned subsidiary or on the part of the members of an overseas company.

Shadow directors

392.Section 223 applies all the requirements of this Chapter to shadow directors (with a small modification in the case of payments for loss of office).

Approval required

393.Section 281(3) applies so that the member approval required is an ordinary resolution, but the company’s articles may require a higher majority or even unanimity

394.Where approval for a transaction or arrangement is required under more than one set of rules in Chapter 4, all relevant sets of rules should apply, unless otherwise provided (section 225). For example, if the matter involves both a substantial property transaction and a loan, approval should be required under section 190 and under section 197 unless in each case a relevant exemption applies. Approval may be given for both purposes by a single resolution.

Memorandum with details of the transaction

395.In the case of long-term service contracts, loans etc and payments for loss of office, a memorandum setting out certain particulars about the transaction requiring approval of the members must be made available to the members.

396.If the approval is to be given by way of written resolution, the memorandum must be sent to the members able to vote on the written resolution no later than when the written resolution is sent to them. Section 224 provides that any accidental failure to send the memorandum to one or more members will not invalidate the approval given by the members, unless the company’s articles state otherwise.

Requirement for Charity Commission consent for charitable companies

397.Section 66 of the Charities Act 1993 renders prior authorisation by the members for certain transactions invalid unless the Charity Commissioners have given their prior written consent. This reflects concern that, in some cases, the members of a charitable company are not independent of the directors, and that requiring their approval would not provide sufficient protection for the charity. Section 226 inserts two new sections into the Charities Act 1993 in place of section 66 of that Act to reflect the changes made by this Chapter.

Commentary

Sections 188 and 189: Service contracts

398.These sections replace section 319 of the 1985 Act and require member approval of long-term service contracts. In broad terms, these are contracts under which a director is guaranteed at least two years of employment with the company of which he is a director, or with any subsidiary of that company.

399.A director’s «service contract» is defined in section 227 to include a contract of service, a contract for services and a letter of appointment as director.

400.Failure to obtain approval allows the company to terminate the service contract at any time by giving reasonable notice. The purpose of this section is to limit the duration of directors’ service contracts, as a long-term contract can make it too expensive for the members to remove a director using the procedure in section 168 (ordinary resolution to remove director) while allowing the members to approve longer arrangements if they wish.

401.The length of service contract for which member approval is required has been reduced from those longer than five years to those longer than two years.

Sections 190 to 196: Substantial property transactions

402.These sections require member approval to substantial property transactions. These are transactions where the company buys or sells a non-cash asset (as defined in section 1163) to or from:

a director of the company;

a director of its holding company;

a person connected with a director of the company; or

a person connected with a director of its holding company.

Approval is only required where the value of the asset exceeds £100,000 or 10% of the company’s net assets (based on its last set of annual accounts or called-up share capital if it has not yet produced any accounts). No approval is required if the value of the asset is less than £5,000.

403.These sections replace sections 320 to 322 of the 1985 Act. The changes include:

permitting a company to enter into a contract which is conditional on member approval (section 190(1)). This implements a recommendation of the Law Commissions. In cases where the approval of the members of the holding company is also required, the company may enter into arrangements conditional on approval being obtained from the members of the holding company (section 190(2)). The company is not to be liable under the contract if member approval is not forthcoming (section 190(3));

providing for the aggregation of non-cash assets forming part of an arrangement or series of arrangements for the purpose of determining whether the financial thresholds have been exceeded so that member approval is required (section 190(5));

excluding payments under directors’ service contracts and payments for loss of office from the requirements of these sections (section 190(6)). This implements a recommendation of the Law Commissions;

raising the minimum value of what may be regarded as a substantial non-cash asset from £2,000 to £5,000 (section 191);

expanding the exception for transactions with members to include the acquisition of assets from a person in his character as a member of the company (section 192(a));

providing an exception for transactions made by companies in administration (section 193). This implements a recommendation of the Law Commissions;

not requiring approval on the part of the members of a company that is in administration or is being wound up (unless it is a members’ voluntary winding up) (section 193).

Sections 197 to 214: Loans, quasi-loans and credit transactions

404.In the case of a private company which is not associated with a public company, section 197 requires member approval for loans and related guarantees or security made by a company for:

a director of the company; or

a director of its holding company.

405.In the case of a public company, or a private company associated with a public company, sections 197, 198, 200 and 201 require member approval for loans, quasi-loans (as defined in section 199), credit transactions (as defined in section 202) and related guarantees or security made by the company for:

a director of the company; or

a director of its holding company;

a person connected with a director of the company; or

a person connected with a director of its holding company.

406.Section 256 explains what is meant by references to associated companies. A holding company is associated with all its subsidiaries, and a subsidiary is associated with its holding company and all the other subsidiaries of its holding company.

407.Member approval is not required by these sections for:

loans, quasi-loans, credit transactions and related guarantees or security to meet expenditure on company business. The total value of transactions under this exception made in respect of a director and any person connected to him must not exceed £50,000 (section 204);

money lent to fund a director’s defence costs for legal proceedings in connection with any alleged negligence, default, breach of duty or breach of trust by him in relation to the company or an associated company (section 205) or in connection with regulatory action or investigation under the same circumstances(section 206);

small loans and quasi-loans, as long as the total value of such loans and quasi-loans made in respect of a director and any person connected to him does not exceed £10,000 (section 207(1));

small credit transactions, as long as the total value of such credit transactions made in respect of a director and any person connected to him does not exceed £15,000 (section 207(2));

credit transactions made in the ordinary course of the company’s business (section 207(3));

intra-group transactions (section 208); and

loans and quasi-loans made by a money-lending company in the ordinary course of the company’s business (as long as the requirements of section 209 are met).

408.These sections replace sections 330 to 341 of the 1985 Act. The changes include:

abolishing the prohibition on loans, quasi-loans etc to directors and replacing it with a requirement for member approval. This implements a recommendation of the CLR;

abolishing the criminal penalty for breach;

replacing the concept of relevant company in section 331 of the 1985 Act with associated company, as defined in section 256;

removing some of the requirements currently imposed by section 337 of the 1985 Act on the exception for expenditure on company business (section 204);

widening the exception for expenditure on company business to include directors of the company’s holding company and connected persons (section 204);

creating a new exception specifically for expenditure in connection with regulatory action or investigations (section 206);

restricting the exceptions for expenditure on defending legal or regulatory proceedings to proceedings in connection with any alleged negligence, default, breach of duty or breach of trust by the director in relation to the company or an associated company (sections 205 and 206);

widening the exception for small loans to include small quasi-loans (section 207(1)) in place of the current exception for short-term small quasi-loans in section 332 of the 1985 Act;

widening the exception for small loans and quasi-loans to include transactions with connected persons (section 207(1));

widening the exception for «home loans» to include those connected persons who are employees (section 209(3));

raising the maximum amounts permitted under the exception for expenditure on company business (section 204), the exception for small loans and small quasi-loans (section 207(1)) and the exception for small credit transactions (section 207(2));

widening the exceptions for intra-group transactions (section 208);

abolishing the maximum amounts permitted under the exception for money-lending companies (section 209); and

allowing affirmation of loans, quasi-loans and credit transactions entered into by the company in line with the provision in respect of substantial property transactions (section 214).

Sections 215 to 222: Payments for loss of office

409.These sections require member approval for payments for loss of office. These are payments made to a director (or former director) to compensate them for ceasing to be a director, or for losing any other office or employment with the company or with a subsidiary of the company. They also include payments made in connection with retirement. In the case of loss of employment or retirement from employment, the employment must relate to the management of the affairs of the company.

410.Member approval is required under section 217 if a company wishes to make a payment for loss of office to:

one of its directors;

a director of its holding company.

411.Member approval is also required if any person (including the company or anyone else) wishes to make a payment for loss of office to a director of the company in connection with the transfer of the whole or any part of the undertaking or the property of the company or of a subsidiary of the company (section 218).

412.In the case of a payment for loss of office to a director in connection with the transfer of shares in the company or in a subsidiary of the company resulting from a takeover bid, approval is required of the holders of the shares to which the bid relates and of any other holders of shares of the same class (section 219).

413.These sections replace sections 312 to 316 of the 1985 Act. The changes include:

extending the requirements to include payments to connected persons (section 215(3));

extending the requirements to include payments to directors in respect of the loss of any office, or employment in connection with the management of the affairs of the company, and not merely loss of office as a director as such (section 215). This implements a recommendation of the Law Commissions;

extending the requirements to include payments by a company to a director of its holding company (section 217(2));

extending the requirements in connection with the transfer of the undertaking or property of the company to include transfers of the undertaking or property of a subsidiary (section 218(2));

extending the requirements in connection with share transfers so as to include all transfers of shares in the company or in a subsidiary resulting from a takeover bid (section 219(1));

excluding the persons making the offer for shares in the company and any associate of them from voting on any resolution to approve a payment for loss of office in connection with a share transfer (section 219(4)). This implements a recommendation of the Law Commissions;

setting out the exception for payments in discharge of certain legal obligations (section 220);

creating a new exception for small payments (section 221);

clarifying the civil consequences of breach of these sections (section 222(1) to (3)); and

resolving conflicts between the remedies where more than one requirement of these sections is breached (section 222(4) and (5)). For example, if the payment contravenes both section 217 and section 219 because it was a payment by a company to one of its directors and it was a payment in connection with a takeover bid, and none of the required member approvals have been obtained, then the payment is held on trust for the persons who have sold their shares as a result of the offer and not on trust for the company making the payment.

Chapter 5: Directors’ Service Contracts

Section 227: Directors’ service contracts

414.This section is a new provision. It defines what is meant in this Part by references to a director’s service contract. The term is used in sections 177, 182, 188 and 190 and in this Chapter. It includes contracts of employment with the company, or with a subsidiary of the company. It also includes contracts for services and letters of appointment to the office of director. The contract may relate to services as a director or to any other services that a director undertakes personally to perform for the company or a subsidiary.

Section 228: Copy of contract or memorandum of terms to be available for inspection

415.This section requires a company to keep available for inspection copies of every director’s service contract entered into by the company or by a subsidiary of the company. If the contract is not in writing, the company must keep available for inspection a written memorandum of its terms. This section, together with sections 229 and 230, replace section 318 of the 1985 Act.

416.Subsection (3) is new. It requires the service contracts to be retained and kept available for inspection by the company for at least one year after they have expired, but the subsection does not require the copies to be retained thereafter. As a result of the expanded definition of service contract in section 227, this section now applies to contracts for services and letters of appointment, as recommended by the Law Commissions.

417.As recommended by the Law Commissions, the exemption for contracts requiring a director to work outside the UK (section 318(5) of the 1985 Act) and the exemption for contracts with less than 12 months to run (section 318(11) of the 1985 Act) have not been retained.

418.Failure to comply with the requirements of this section is a criminal offence for which every officer of the company who is in default may be held liable on summary conviction to a fine not exceeding level 3 on the standard scale (currently £1,000) or in cases of continued contravention a daily default fine not exceeding one-tenth of that. In a change from the current position under section 318 of the 1985 Act, the company will no longer be liable under the criminal offence.

Section 229: Right of member to inspect and request copy

419.This section gives members a right to inspect without charge the copies of service contracts held by the company in accordance with section 228. Subsection (2) creates a new right for members to request a copy of the service contracts on payment of a fee set by regulations under section 1137.

Section 230: Directors’ service contracts: application of provisions to shadow directors

420.This section applies the requirements of this Chapter to service contracts with shadow directors.

Chapter 6: Contracts With Sole Members Who are Directors

Section 231: Contract with sole member who is also a director

421.Under this section, contracts entered into by a limited company with its only member must be recorded in writing if the sole member is also a director or shadow director of the company. This does not apply to contracts entered into in the ordinary course of the company’s business. The purpose of this section is to ensure that records are kept in those cases where there is a high risk of the lines becoming blurred between where a person acts in his personal capacity and when he acts on behalf of the company. This may be of particular interest to a liquidator should the company become insolvent.

422.This section replaces section 322B of the 1985 Act, which implements article 5 of the 12th Company Law Directive (89/667/EEC). As the Act will permit public companies to have a single shareholder, this section applies to both private and public limited companies.

423.A failure to record the contract in writing will not affect the validity of the contract (subsection (6)) but other legislation or rules of law might (subsection (7)).

424.If there is a breach of this section, every officer of the company in default is liable on summary conviction to a fine not exceeding level 5 on the standard scale (currently £5,000). In a change from the current position under section 322B of the 1985 Act, the company will no longer be liable under the criminal offence.

Chapter 7: Directors’ Liabilities

425.The sections in this Chapter (sections 232 to 239) deal with two matters:

they restate sections 309A to 309C of the 1985 Act (provisions relating to directors’ liability). The only substantive changes to those sections are a new provision permitting companies to indemnify the directors of companies acting as trustees of occupational pension schemes (section 235), the creation of a right for members to request a copy of a qualifying third party indemnity provision (section 238(2)), the removal of criminal liability on the part of the company for failures to comply with the requirements of section 237 (copy of qualifying indemnity provision to be available for inspection), provision for regulations to specify places in addition to the registered office where inspection may take place (section 237(3)) and a requirement for all qualifying indemnity provisions to be retained by a company for at least one year after they have expired (section 237(4));

they introduce a substantive reform of the law on ratification of acts giving rise to liability on the part of a director (section 239).

Section 232: Provisions protecting directors from liability

426.This section prohibits a company from exempting a director from, or indemnifying him against, any liability in connection with any negligence, default, breach of duty or breach of trust by him in relation to the company. Subsection (2) prohibits indemnification by an associated company as well as by his own company. «Associated company» is defined in section 256 as, in effect, a company in the same group.

427.Any provision, whether in the company’s articles, in a contract or otherwise, attempting to exempt or indemnify a director in breach of this section is void. But this does not apply to lawful provisions in the articles for dealing with conflicts of interest.

Section 233: Provision of insurance

428.This section permits a company to purchase and maintain insurance for its directors, or the directors of an associated company, against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to the company of which they are a director.

Section 234: Qualifying third party indemnity provision

429.This section permits (but does not require) companies to indemnify directors in respect of proceedings brought by third parties (such as class actions in the US). It also permits (but does not require) companies to indemnify directors in respect of applications for relief from liability made under section 1157 (general power of the court to grant relief in case of honest and reasonable conduct) or under section 661(3) or (4)(power of court to grant relief in case of acquisition of shares by innocent nominee).

430.The indemnity may cover liability incurred by the director to any person other than the company or an associated company. This may include both legal costs and the financial costs of an adverse judgement. But the indemnity must not cover liabilities to the company or to any associated company (subsection (2)).

431.Another condition is that the indemnity must not cover criminal fines, penalties imposed by regulatory bodies (such as the Financial Services Authority), the defence costs of criminal proceedings where the director is found guilty, the defence costs of civil proceedings successfully brought against the director by the company or an associated company and the costs of unsuccessful applications by the director for relief (subsection (3)).

432.Subsections (4) and (5) explain when legal proceedings will be considered to have concluded for the purpose of the conditions imposed by subsection (3).

433.An indemnity that complies with these conditions is described as a qualifying third party indemnity provision.

Section 235: Qualifying pension scheme indemnity provision

434.This section permits (but does not require) companies to indemnify a director of a company acting as a trustee of an occupational pension scheme against liability incurred in connection with the company’s activities as trustee of the scheme. An indemnity that complies with the conditions set out in this section is described as a qualifying pension scheme indemnity provision.

Section 236: Qualifying indemnity provision to be disclosed in directors’ report

435.If a qualifying indemnity provision is in force for the benefit of one or more directors or was in force during the previous year, this must be disclosed by the company in the directors’ report (as to the directors’ report, see Chapter 5 of Part 15). Where the director is of one company but the qualifying indemnity provision is provided by an associated company, then it must be disclosed in the directors' reports of both companies. Companies which choose not to indemnify directors will not have to make any disclosure.

Section 237: Copy of qualifying indemnity provision to be available for inspection

436.This section requires a company to keep available for inspection copies of all the qualifying indemnity provisions it has made for its own directors, and also copies of all those it has made for directors of associated companies.

437.Subsection (4) is a new provision. It requires all qualifying indemnity provisions to be retained and made available for inspection for a further year after they have expired or terminated. But the company is not required by this section to retain copies of the indemnity provision thereafter.

438.Subsection (6) makes a failure to comply with the requirements of this section a criminal offence. The maximum penalty that can be imposed on summary conviction is a fine not exceeding level 3 on the standard scale (currently £1,000) or in cases of continued contravention a daily default fine not exceeding one-tenth of that. In a change from the current position under section 309C of the 1985 Act, the company will no longer be liable under the criminal offence.

Section 238: Right of member to inspect and request copy

439.This section gives members a right to inspect without charge the copies of the qualifying indemnity provisions (or where they are not in writing, the written memorandum of their terms) held by the company in accordance with section 237.

440.This section also creates a new right for members on payment of a fee to request a copy of the copy or memorandum held by the company. The fee will be set by regulations made under section 1137.

Section 239: Ratification of acts of directors

441.This section preserves the current law on ratification of acts of directors, but with one significant change. Any decision by a company to ratify conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company must be taken by the members, and without reliance on the votes in favour by the director or any connected person. Section 252 defines what is meant by a person being connected with a director. For the purposes of this section it may also include fellow directors (subsection (5)(d)).

442.If the ratification decision is taken by way of a written resolution (see Chapter 2 of Part 13) the director and his connected persons may not take part in the written resolution procedure (subsection (3)). This means that the company does not need to send them a copy of the written resolution, and they are not counted when determining the number of votes required for the written resolution to be passed.

443.If the ratification decision is taken at a meeting, those members whose votes are to be disregarded may still attend the meeting, take part in the meeting and count towards the quorum for the meeting (if their membership gives them the right to do so).

444.Subsection (6) makes clear that nothing in this section changes the law on unanimous consent, so the restrictions imposed by this section as to who may vote on a ratification resolution will not apply when every member votes (informally or otherwise) in favour of the resolution. The subsection also makes clear that nothing in this section removes any powers of the directors that they may have to manage the affairs of the company.

445.Subsection (7) explains that the requirements imposed by this section are in addition to any other limitations or restrictions imposed by the law as to what may or may not be ratified and when.

Chapter 8: Directors’ Residential Addresses: Protection from Disclosure

446.Under the 1985 Act (and previous Companies Acts), the usual residential address of every director must be entered on the public record held by:

the registrar; and

each company of which he is a director in its register of directors.

Access to the public record held by the registrar is made in a variety of ways, including daily bulk downloading by some subscribers. There is also a public right to inspect companies’ registers of directors.

447.There is an exception for directors at serious risk of violence or intimidation, e.g. from political activists and terrorists. Under sections 723B – 723E of the 1985 Act, introduced by the Criminal Justice and Police Act 2001, they may apply for a «confidentiality order». A director with a confidentiality order provides a single service address in addition to his usual residential address. The service address is entered on the public record; the usual residential address is kept on a secure register to which access is restricted to specified enforcement authorities. The historic record is not affected by the confidentiality order. By October 2006, nearly 11,000 Confidentiality Orders had been issued of which, it is estimated that nearly 7,000 were to directors (certain other individuals, eg partners in Limited Liability Partnerships, are also eligible).

448.The CLR considered it essential that directors’ residential addresses be filed with the central register, so that enforcement and regulatory bodies as well as liquidators and, in some circumstances, creditors and shareholders can discover the individual’s residential address. However they were concerned that unrestricted public access to directors’ residential addresses had been abused. They considered that there should not be any discretion as to whether particular addresses should or should not be placed on the public record. Therefore, while welcoming the introduction of the confidentiality order regime, they recommended all directors be given the option of:

either, as now, providing their residential address for the public record;

or, providing both a service address and their residential address, with the service address being on the public record and the residential address being on a separate secure register to which access would be restricted. Access to the restricted register would be available to certain public authorities. Other parties, such as members and creditors, should have a right to apply to the court for access to a director’s residential address. (Final Report, paragraph 11.46)

449.This Chapter of the Act, together with the provisions on the register of directors’ residential addresses in Chapter 1 of this Part, is based on this recommendation. These provisions, which are all new, replace the confidentiality order regime.

Section 240: Protected information

450.This section sets out the information about directors’ usual residential addresses, recorded under Chapter 1 of this Part, that will be protected under the new provisions.

Section 241: Protected information: restriction on use or disclosure by company

451.This section provides for the protection that a company must give to the information covered by section 240. It prohibits the company from using or disclosing an individual director’s home address without his consent except for communicating with him, or to comply with an obligation to send information to the registrar or when required by a court.

Section 242: Protected information: restriction on use or disclosure by the registrar

452.This section provides for protection by the registrar of information that is covered by section 240. The registrar need only protect information where it is submitted on a form where directors’ usual residential addresses are required and entered in the appropriate place. The registrar is not obliged to check all documents submitted to her to ensure that an address has not been inadvertently disclosed. The protection is not retrospective: it does not apply to information on the public record when these provisions come into force. The Act makes separate provision, in section 1088, for removal of addresses from the register in circumstances specified by regulations.

Section 243: Permitted use or disclosure by the registrar

453.This section provides for certain kinds of permitted use or disclosure of protected information, ie directors’ home addresses and whether a service address is a home address. Subsection (1) provides that the registrar may use the protected information for communicating with the director in question. Subsection (2) provides that the registrar may disclose protected information to a public authority or credit reference agency (the definition of the latter is drawn from the Consumer Credit Act 1974) but this should be read with subsections (3) and (4). Subsection (3) confers power on the Secretary of State to make regulations specifying conditions that must be met before the registrar may disclose protected information. The regulations may also provide for fees to be paid by the authority or agency seeking the address. Subsection (4) provides power to make regulations specifying the circumstances in which an application can be made for a director’s address not to be revealed to a credit reference agency.

Section 244: Disclosure under court order

454.This section provides for two circumstances in which the court may require the company to disclose protected information. The first circumstance is that the service address is not effective; the second is that the home address is needed for the enforcement of an order or decree of the court. If the company cannot provide the address, the court may require the registrar to reveal it. Subsection (3) provides that the application for the order may be made not only by a liquidator, creditor or member of the company but also by anyone with sufficient interest.

Section 245: Circumstances in which registrar may put address on the public record.

455.This section provides that if a service address is not effective, then the home address can be put on the public record. It provides for the registrar to send a warning notice, with a specified period for representations before the intended action, both to the director and to every company of which he is a director. The registrar must take account of any representations made within the specified period in deciding whether to proceed as provided by the next section.

Section 246: Putting the address on the public record

456.This section provides that, if the registrar is putting a director’s home address on the public record under the previous section, then the registrar updates the public record as if she had been notified that the service address is the director’s home address. She must also notify both the director and every company of which he/she is a director. The companies must each put the director’s home address on its register of directors as his/her service address. And for the next five years, the director may not register a service address other than his usual residential address.

Chapter 9: Supplementary Provisions

Section 247: Power to make provision for employees on cessation or transfer of business

457.This section confers a power on the directors to make provision for the benefit of employees (including former employees) of the company or its subsidiaries on the cessation or transfer of the whole or part of the undertaking of the company or the subsidiary (subsection (1)).

458.The directors may exercise this power, even if it will not promote the success of the company. The directors’ general duty under section 172 to act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole, does not apply when the directors exercise this power to make provision for employees (subsection (2)).

459.There are a number of conditions to the exercise of this power. It must be authorised by a resolution of the members or, if the articles of the company allow it, by the board of directors. The company’s articles may also impose further conditions on its use (subsection (6)).

460.Any payments made by the directors using the power conferred by this section must be made before the commencement of the winding up of the company and can only be made out of profits available for dividend. Section 187 of the Insolvency Act 1986 confers power to make provision for employees once the company has commenced winding up.

461.This section replaces section 719 of the 1985 Act. In a change from that section, the directors can no longer use the power conferred by this section to make payments to themselves or to former directors or to shadow directors, unless the payments are authorised by the members. The CLR recommended that directors should be prevented from abusing the power by making excessive payments to themselves.

Section 248: Minutes of directors’ meetings

462.This section, together with section 249, replaces the provisions of section 382 of the 1985 Act relating to records of meetings of directors. The requirements of section 382 of the 1985 Act relating to records of meetings of managers have not been retained. This section requires a company to record minutes of all meetings of its directors.

463.Subsection (2) is new. The minutes must be kept for at least ten years.

464.Failure to make and keep minutes as required by this section is a criminal offence, applying to every officer of the company who is in default. In a change from section 382 of the 1985 Act, liability for the offence will no longer fall on the company.

465.Part 37 of the Act makes provision as to the form in which company records (including minutes) may be kept and imposes a duty to take precautions against falsification.

Section 249: Minutes as evidence

466.This section makes provision in respect of the evidential value of the minutes of directors’ meetings.

Section 250: «Director»

467.This section restates the definition of «director» in section 741(1) of the 1985 Act.

Section 251: «Shadow director»

468.This section restates the definition of «shadow director» in section 741(2) of the 1985 Act.

Section 252: Persons connected with a director

469.This section sets out the definition of «connected person» which is used in many of the sections in this Part in relation to the regulation of directors. The persons who are «connected» for this purpose with a director include:

certain family members (see section 253);

certain companies with which the director is connected (see section 254);

trustees of a trust under which the director or a relative mentioned in section 253 or a company with which the director is connected is a beneficiary (but not if the trust exists for the purposes of an employees’ share scheme as defined in section 1166 or a pension scheme);

certain partners; and

certain firms with legal personality (such as a Scottish firm in which the director is a partner).

470.This section, together with sections 253 to 255, replaces section 346 of the 1985 Act.

Section 253: Members of a director’s family

471.This section sets out those members of a director’s family who fall within the definition of persons connected with the director. The list includes all those family members currently falling within the definition of connected person in section 346 of the 1985 Act, and in addition it covers:

the director’s parents;

children or step-children of the director who are over 18 years old (those under 18 were already included under section 346 of the 1985 Act);

persons with whom the director lives as partner in an enduring family relationship; and

children or step-children of the director’s unmarried partner if they live with the director and are under 18 years of age.

472.This implements the Law Commissions’ recommendation that the definition of connected person be extended so as to include cohabitants, infant children of the cohabitant if they live with the director, adult children of the director and the director’s parents. The recommendation that the definition be extended to siblings has not been implemented.

Section 254: Director «connected with» a body corporate

473.This section determines whether a company or other body corporate is a person connected with a director. Broadly speaking, the director, together with any other person connected with him, must be interested in 20% of the equity share capital, or control (directly or indirectly through another body corporate controlled by them) more than 20% of the voting power exercisable at any general meeting.

474.Schedule 1 contains the rules for determining whether a person is «interested in shares» for this purpose.

Section 255: Director «controlling» a body corporate

475.This section defines the circumstances in which a director is deemed to control a body corporate for the purposes of section 254. These circumstances involve two cumulative hurdles. First, the director or any other person connected with him must be interested in the equity share capital or be entitled to control some part of the voting power exercisable at any general meeting. Secondly, the director, fellow directors and other persons connected with him must be interested in more than 50% of the equity share capital or be entitled to control more than 50% of the voting power exercisable at any general meeting.

476.Schedule 1 contains the rules for determining whether a person is «interested in shares» for this purpose.

Section 256: Associated bodies corporate

477.This section is a new provision. It explains what is meant by references in this Part to associated bodies corporate and associated companies. A holding company is associated with all its subsidiaries, and a subsidiary is associated with its holding company and all the other subsidiaries of its holding company.

Section 257: References to company’s constitution

478.This section is new. It makes provision as to the meaning of references to a company’s constitution in this Part.

479.The section is relevant to a number of provisions in this Part, including the duty to act within powers (section 171) and the duty to exercise independent judgment (section 173).

Section 258: Power to increase financial limits

480.This section confers power on the Secretary of State by order to increase financial limits in this Part of the Act. All the financial limits appear in Chapter 4 (provisions regulating transactions with directors requiring approval of members). This section restates section 345 of the 1985 Act.

Section 259: Transactions under foreign law

481.This section makes clear that the rules under this Part of the Act apply whether or not the proper law governing a transaction or arrangement is the law of the UK or a part of the UK.

482.This provision is necessary to prevent parties seeking to avoid the application of the rules relating to approval of long-term service contracts, substantial property transactions and loans and similar transactions by choosing a foreign law. This section restates section 347 of the 1985 Act.