Chapter 4: Directors’ Duties and Responsibilities Flashcards
1
Q
The role of directors
A
This element covers the role of a director in a company.
How directors are appointed and removed from office is dealt with in the next topic.
2
Q
Introduction
A
One key point to remember when considering the role of directors is that, as a company is inanimate, it is the directors who on a day to day basis are responsible for managing the company through an agency relationship. The directors are accountable to the company itself rather than to the shareholders directly. The shareholders own the company yet have input only into certain key decisions. It is therefore important to remember the relationship between directors and shareholders:
3
Q
Directors
A
- Manage the company on a day to day basis – on an agency basis
- Certain actions can only be taken by directors if the shareholders have given authority
- Owe duties to the company
4
Q
Shareholders
A
- Own the company
- Are able to control key decisions through shareholder resolutions eg to give directors authority to change the name of the company
5
Q
Shareholders
A
It is common for directors and shareholders to be the same people in a company.
Directors’ authority to manage the company
6
Q
Directors’ authority to manage the company
A
CA 2006 reserves certain important decisions for shareholder approval, such as changing the company’s name (unless the articles provide otherwise), amending the articles of association, removing directors and so on. The board of a company with MA is usually free under a company’s articles to make decisions on behalf of the company on all other matters (MA 3).
7
Q
Directors’ authority to manage the company
A
The directors can therefore act on behalf of the company to employ individuals (other than directors on long term service contracts) and decide what they will be paid, enter into contracts with customers and suppliers, buy and sell company property, raise funds by borrowing from banks and authorise the company’s assets to be used as security. The directors are also responsible for putting together company accounts and for supplying information to auditors. These are just a few examples of the decisions that directors are free to make without shareholder approval.
8
Q
The board of a company with MA is usually free under a company’s articles to make decisions on behalf of the company on all other matters (MA 3).
A
MA 5 allows the Board of Directors to delegate a particular decision to one of the directors or a committee. For example, a HR Director might be delegated decision-making with regards to the HR decisions of a company.
9
Q
Directors’ accountability
A
The power delegated to the directors is therefore extremely wide and, if this power were left unchecked and unregulated, the less ethically minded might start using companies as a medium for a variety of corrupt practices. Certain directors may, for example, decide to lend themselves company funds on very favourable terms or even give false or misleading statements in the accounts to make the company look more attractive to investors or banks.
10
Q
Directors’ accountability
A
In order to prevent such practices and to ensure companies are run for the benefit of, amongst others, their shareholders and for the protection of the company’s creditors, directors’ actions and powers are restricted and regulated by statute. The key provisions are included in Part 10 of CA 2006, which includes directors’ general duties. We will look at directors’ duties in detail later in this topic.
11
Q
Directors’ accountability
A
Directors can be made to account for wrongs done through civil and criminal actions taken against them for breaching the Companies Acts. They may also be found guilty of criminal actions and sentenced under other legislation eg fraud under the Fraud Act 2006, and/or offences under the Theft Act 1968; insider dealing under the Criminal Justice Act 1993; money laundering under the Proceeds of Crime Act 2002.
12
Q
What is a director?
A
The term ‘director’ is not defined in CA 2006; instead s 250 CA 2006 states that ‘director’ includes any person occupying the position of director, by whatever name called.
There are a number of categories of director which we consider further:
At law:
- de jure;
- de facto, and
- shadow directors
In practice:
- executive and
- non executive directors
The company’s articles may also provide for alternate directors.
13
Q
De jure directors and de facto directors
A
A de jure director is a director who has been validly appointed at law.
Under s 154 CA 2006:
- a private limited company must have at least one director and
- a public limited company must have at least two directors.
Although a company can be appointed as a director, every company must have at least one director who is a natural person (s 155(1) CA 2006) to ensure that for all companies, there will always be one individual in place to aid accountability.
14
Q
De jure directors and de facto directors
A
The CA 2006 does not prescribe a maximum number of directors and neither do the MA, but a company can put a maximum number of directors into its own articles.
Under s 157 CA 2006 a person may not be appointed as a director unless they are at least 16 years old. ECCTA has now amended CA 2006 by inserting a new section 159A into CA 2006. This section is effective from 4 March 2024, and prohibits a person from being appointed as a company director if that person is disqualified under director disqualification legislation, unless they have permission of the Court.
A de facto director is someone who assumes to act as a director but has in fact not been validly appointed. The fiduciary duties and liabilities apply to de facto directors as they do to de jure directors.
15
Q
Shadow directors
A
Sometimes a person (usually a shareholder) may try to exert influence over the board but without being appointed as a director, in an effort to avoid the duties imposed on directors under CA 2006 and the common law.
Section 251(1) CA 2006 defines a shadow director as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’. Section 251(2) makes it clear that professional advisers are not to be regarded as shadow directors eg an accountant providing professional advice on the company’s finances will not usually be a shadow director, even if the directors follow the advice of the accountant to the letter.
16
Q
Shadow directors
A
This legislation is designed to ensure that anyone who acts as a director, even if they are not technically appointed as one, is subject to the duties and restrictions which apply to all directors. For example, a friend of a director who gives advice from ‘behind the scenes’, which the directors follow, would be seen as a shadow director. Most of the provisions in the CA 2006 and the Insolvency Act 1986 imposing duties, obligations or restrictions on directors therefore apply equally to shadow directors.
(See for example, s 162(6) in respect of the keeping of registers of directors, s 223 in respect of transactions with directors requiring shareholder approval, and ss 230 - 231 CA 2006 concerning the keeping of copies of service contracts and the wrongful trading provisions under s 214 IA 1986.)
17
Q
Executive and non-executive directors
A
The CA 2006 does not differentiate between executive and non-executive directors, but in practice there is a distinction. However, note that the duties, obligations and restrictions placed on directors under CA 2006apply to all directors, executive and non-executive.
18
Q
Executive directors
A
An executive director is a director who has been appointed to executive office. Such a director will generally spend the majority, if not all, of their working time on the business of the company and will be both an officer and an employee of his company. Examples include a Finance Director, Managing Director, Marketing Director.
19
Q
Non-executive directors
A
A non-executive director is also an officer of the company but will not be an employee of the company. Non-executive directors do not take part in the day-to-day running of the company. Their role is generally to provide independent guidance and advice to the board and to protect the interests of shareholders.
20
Q
Alternate directors
A
The office of director is a personal responsibility. However, some companies in their articles provide for alternate directors to take the place of a director where one or more directors are absent.
An alternate director is usually either a fellow director of the company or someone who has been approved by a resolution of the board of directors. The alternate director has the voting powers of the absent director.
The MA do not provide for the appointment of alternate directors and, since it is now possible to hold board meetings over the telephone and to pass board resolutions by means of written resolutions, the use of alternate directors is becoming quite rare.
Whether or not the provisions of CA 2006 apply to alternate directors is a matter of construction, but it is thought that the duties of directors will apply equally to alternate directors.
21
Q
Company secretary
A
A company secretary’s main duties are to keep the company books up-to-date, produce minutes of board and general meetings, and make sure that all necessary filings are made at Companies House. It is not a part of their role to take decisions on behalf of the company, which is the domain of either the directors or the shareholders.
In the past all companies were required to have a company secretary. But under CA 2006:
22
Q
Company secretary
A
- a private company is not required to have a company secretary (s 270(1) CA 2006) unless the articles require it to have one. If a private company does not have a company secretary, the directors (or any person the directors authorise) may do anything that the secretary was required or authorised to do (s 270(3)(b) CA 2006).
23
Q
Company secretary
A
- a public company must have a company secretary (s 271 CA 2006).
Part 12 of the CA 2006 applies to all companies with a company secretary. A public company secretary must have the requisite knowledge and experience, and one of the qualifications set out in s 273(2) CA 2006 (for example, the secretary may be a solicitor or a chartered accountant). The directors appoint the secretary and are required to check that the secretary qualifies under these provisions.
24
Q
Summary
A
- Directors are responsible for the day-to-day management of the company.
- Directors are agents of the company.
- Directors who are validly appointed may be referred to as de jure directors. These directors may be executive or non-executive.
- It is possible for other individuals to act as a director where they are not in fact validly appointed as such. De facto, shadow and alternate directors fall into this category.
- Private companies are not required to have a company secretary. If a private company does not have a company secretary, any director may fulfil this role.
- Public companies are required to have a company secretary.
- All the different types of director are governed by the principles of CA 2006.
25
Appointment of directors
CA 2006 does not stipulate a procedure for the appointment of directors, so this is something that will be governed by the Articles of the company.
The MA deal with the matter simply. Companies with MA may appoint a director: By an ordinary resolution of the shareholders - MA 17(1)(a). By a decision of the directors - MA 17(1)(b)
26
Appointment of directors
It is usual for the board of directors to appoint new directors under MA17(1)(b) because is easier to put into effect. Unless there is a particular reason for using the ordinary resolution procedure, a director will be appointed by the majority of the other directors.
Of course, companies may instead have custom Articles setting out an alternative procedure for the appointment of directors, therefore you must always check the Articles of a company before advising on the appointment of directors.
27
Service contracts
An executive director will be an employee of the company. As an employee, they should be given a written contract of employment (otherwise known as a service contract), setting out the terms and conditions of employment including duties, remuneration package, notice provisions etc. There is no automatic entitlement for directors to be paid for their services – this is something that the board can determine, subject to the provisions of the company's articles.
28
Service contracts
The Company has an obligation to keep its directors’ service contracts contracts (or, where the contracts are not in writing, memoranda of their terms) at its registered office for inspection by the members (s 228 CA 2006).
The effect of Art 19 MA is that the terms of an individual director’s service contract, including remuneration, are for the board to determine. As a general rule, a director’s service agreement will only require the approval of a resolution of the board of directors. However, shareholder approval is required to enter into long-term service contracts under s 188 CA 2006. You will look at this in the next element.
It is worth noting that one individual can be a director, a shareholder and an employee of a company. These are three separate roles.
29
Disclosure of identity of directors and secretary
The CA 2006 requires certain details about a company's directors to be disclosed either publicly or to the members.
Every company must maintain a register of its directors (s 162(1) CA 2006) and secretary (s 275(1) CA 2006) and should keep these registers at its registered office**.**
Each company must also notify the Registrar of Companies (ie Companies House) of changes relating to its directors (s 167 CA 2006) or secretary (s 276 CA 2006) using forms published by Companies House (eg AP01 for Appointment of Director).
30
Disclosure of identity of directors and secretary
The particulars which must be registered in relation to directors are specified in ss 163(1) and 164 CA 2006 (and those for secretaries in ss 277(1) and 278(1) CA 2006).
The information kept at Companies House is available for inspection by the public (s1085(1) CA 2006) subject to some very limited exceptions, and, in addition, the register kept at a company's registered office must be open for inspection by any member of the company without charge and by any other person on payment of a fee (ss 162(5) and 275(5) CA 2006 for the register of directors and secretaries respectively).
31
Privacy for Officers of the Company
The provisions of CA 2006 allow the directors and secretary more confidentiality than had previously been the case.
Section 163(1) CA 2006 specifies that a company’s register of directors must contain the following particulars in the case of an individual (a) name and any former name; (b) a service address; (c) the country or state in which he is usually resident; (d) nationality; (e) business occupation (if any); (f) date of birth.
32
Privacy for Officers of the Company
S.277(1) specifies that a company’s register of secretaries must contain the following particulars in the case of an individual (a) name and any former name; (b) address.. This service address can either be the director’s residential address (if they are not concerned with the need for privacy) or could simply be the company’s registered office and will be the only address available to the public generally. Residential addresses that are already on the public register will not be removed automatically.
Individual directors (but not secretaries) will still have to provide their residential address under s 165 CA 2006, but this information will be kept on a separate, secure register. This register is not open to public inspection.
33
Disclosure required: annual accounts
Section 412 CA 2006 relates to information about directors’ (and past directors’) remuneration and what information will need to be included in the company’s annual accounts. Two SIs currently set out in detail the information which needs to be included in the notes to a company’s annual accounts. This includes information relating to:
* the directors’ salaries, bonus payments and pension entitlements; and
* compensation paid to directors and past directors for loss of office.
Section 412 CA 2006 also requires details to be disclosed of any payments made to, or receivable by, a person connected to such a director or a body corporate controlled by a director.
34
Disclosure required: annual accounts
Section 413 CA 2006 relates to the disclosure of information on advances and credits given by a company to its directors and guarantees entered into by a company on behalf of its directors. Section 413 CA 2006 applies to a person who was a director at any time during the applicable financial year.
35
Removal of a director by the shareholders
The ability to remove a director from office is the ultimate sanction that shareholders have against a director. The director may not be performing well in their role or there may be a personality clash or a difference of opinion about company strategy and the best way to expand the business of the company.
Under s 168(1) CA 2006, a company (ie the shareholders) may by ordinary resolution remove a director before the expiration of their period of office.
Under s 168(2) CA 2006 special notice (28 days) is required of a removal resolution.
It is not possible for the Board to remove a director (unless the Articles specifically provide for this).
Directors who are also shareholders are allowed to vote in their capacity as a shareholder on the ordinary resolution to remove them.
You will learn about the process by which shareholders may remove a director in detail in ‘The rights and remedies of shareholders’ topic (‘Removal of a Director’ element).
36
Vacation from office
The other ways in which an individual may cease to be a director are:
Resignation by notice
A director may simply take the decision to resign from the board by tendering a letter of resignation. This procedure is provided for in MA 18(f). It is usual, although not obligatory, in these circumstances for the board to pass a board resolution accepting the letter of resignation.
37
Automatic termination
Under MA 18 a person ceases to be a director as soon as:
* the director becomes disqualified from being a director;
* the director becomes the subject of an individual voluntary arrangement (or similar);
* the director becomes bankrupt, or
* a registered medical practitioner who is treating the director states in writing to the company that the director has become physically or mentally incapable of acting as a director and will remain so for more than three months.
38
* Disqualification - Company Directors Disqualification Act 1986 (‘CDDA’)
* The CDDA is the key piece of legislation regarding disqualification of directors. Under this Act, the court may make a disqualification order against a person preventing them, unless they obtain leave of the court, to be a director, liquidator, receiver or in any other way directly or indirectly involved in the promotion, formation or management of a company. The purpose of such an order is to protect the public against the activities of such a director. Grounds for disqualification include fraudulent or wrongful trading or persistent breaches of company law.
* The period of disqualification is for a maximum of 15 years. If a director has been disqualified under the CDDA, it is a criminal offence to participate directly or indirectly in corporate management without leave of the court.
39
* Retirement by rotation
* The model articles for public companies require retirement and reappointment of directors by the members every three years. In addition, all directors of listed companies are subject to annual re-election.
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* Companies House filing requirements
* When a director leaves office, the company must both update the company’s register of directors and also give notice to Companies House by filing form TM01 (Termination of appointment of director).
41
Summary
* The appointment of directors and granting of service contracts are governed by the provisions of a company’s articles. In general, the board decides on the appointments and terms of service contracts, although long-term service contracts will require shareholder approval.
* Companies are required to inform Companies House when they appoint new directors or when directors leave office and must keep a register of their directors.
* Directors’ personal details must be provided to Companies House although their residential addresses may be kept private.
42
Summary
* Certain information relating to financial payments to directors need to be disclosed in the company’s annual accounts which must be filed at Companies House.
* Directors may be removed from office by an ordinary resolution of shareholders.
* Directors may also leave office through resignation, disqualification under CDDA 1986, rotation or automatically if one of the reasons in MA 18 applies.
43
Duties and responsibilities of directors I
This element considers the duties a director owes to the company under CA 2006 s 171 – 174.
The next element will consider the duties owed to the company under s 175 – 177 and the consequences of breach of duty.
44
Introduction: Directors’ duties
As you will have seen, it is the directors who on a day-to-day basis are responsible for managing the company (MA 3). In order to protect the shareholders and creditors of the company from directors exploiting or abusing their powers to act in their own self-interest, directors are subject to the extensive duties. Whenever a director is making a decision, they must always consider all the duties to which they are subject.
45
171-177 CA 2006
The duties of directors were developed by the common law and equity but were codified in CA 2006, specifically ss 171-177 CA 2006. The statutory general duties should be interpreted and applied in the same way as common law rules and equitable principles (s 170(4) CA 2006).
46
General Duties
The general duties of directors are owed by a director to the company (and not to the shareholders directly). Any breach of duty by a director is therefore a wrong done to the company and it is the company who would therefore be the claimant in proceedings in respect of a breach of duty by a director. Note though that when a company is in financial difficulty, the position changes and the directors' duties shift to the protection of the creditors. We will look at this in more detail in the insolvency topics.
47
The general duties of directors ss 170 – 177 CA 2006
The general duties are set out in sections 171-177 CA 2006 and are as follows:
* Duty to act within powers (s 171 CA 2006);
* Duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006);
* Duty to exercise independent judgment (s 173 CA 2006);
* Duty to exercise reasonable care, skill and diligence (s 174 CA 2006);
* Duty to avoid conflicts of interest (s 175 CA 2006);
48
The general duties of directors ss 170 – 177 CA 2006
* Duty not to accept benefits from third parties (s 176 CA 2006); and
* Duty to declare any interest in a proposed transaction (s 177 CA 2006).
We will cover the duties under s 171 – 174 in this element. Sections 175 – 177 are covered in the next element.
Note that directors are also subject to duties under legislation other than CA 2006, egthose obligations contained within the Insolvency Act 1986. You will learn more about the responsibilities of directors of an insolvent company later on in this module.
49
Section 171 CA 2006: Duty to act within powers
This section effectively sets out 2 separate duties:
1. Duty to act within the company’s constitution
The company's constitution is defined in s 257 CA 2006 and includes everything set out in the company's articles of association and decisions taken in accordance with the articles (ie shareholder resolutions). A director is in breach of this duty if they act without authority, eg commit the company to borrow more than the articles allow without prior shareholder approval.
50
2. Duty to exercise powers for the purposes for which they are conferred
Directors must not use their powers for improper purposes (eg for personal gain).
Section 172 CA 2006: Duty to promote the success of the company
This duty has been the subject of much debate. It is seen as codifying the previous common law duty requiring directors to act in the ‘best interests’ of the company. It forms the central duty under the new regime.
Section 172 CA 2006 stipulates that a director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
51
Long-term increase in value
The Government has stated that ‘success’ should normally mean, for commercial companies, a ‘long-term increase in value’.
The list of matters to be considered is not exhaustive**. It is clear that the list is secondary to the duty to shareholders under s 172 CA 2006, and that the duty is owed to the company and not to the third party.**
In exercising this duty, a director is required to have regard to a range of non-exhaustive matters which are set out in s 172(1) CA 2006, including:
52
Long-term increase in value
the likely long-term consequences of any decision
employees’ interests
the need to foster relationships with suppliers, customers and others
the impact of the company’s operations on the community and the environment
the desirability of the company’s maintaining a reputation for high standards of business conduct
the need to act fairly as between the members of a company
53
Enlightened Shareholder Value
Although many of these matters were not specifically provided for under the common law, many companies would routinely consider such matters, as a necessary part of good business practice following the concept of ‘enlightened shareholder value’. This is a term used to describe the ‘middle way’ between, on the one hand, running the company purely to maximise shareholders’ interests/profits and, on the other hand, a pluralist approach which involves acting in the interests of a wider group of stakeholders.
54
Example
The directors of WYZ plc are deciding whether the company ought to install a new oil pipeline. They need to have regard to the range of matters listed in s 172(1) CA 2006, including the environmental implications of the pipeline, because these are mentioned in s172(1)(d) CA 2006.
However, having had regard to those matters, the directors may ultimately go ahead and install the pipeline anyway, causing a degree of environmental damage, if it promoted the success of the company to do so and is not in conflict with the other stakeholder factors to be considered under s 172 or their other duties.
55
Compliance with s 172 CA 2006
Since the introduction of the statutory duties there has been some uncertainty as to how to balance the various matters in the list, which will inevitably conflict from time to time.
One fear was that companies may feel the need to respond by having more detailed board minutes to document how they have considered each area for every decision made. Another was that the new duty under s 172 CA 2006 may lead to increased litigation. Neither fear has yet come to pass.
56
Compliance with s 172 CA 2006
Many companies are taking the common-sense approach of ensuring board minutes clearly note that consideration has been given to the s 172 CA 2006 duty when taking board decisions particularly, with regard to significant commercial decisions, there will have been the requisite amount of research, discussion and briefing of the board to amply demonstrate consideration of the matters in s 172(1) CA 2006 should the company be challenged.
57
Compliance with s 172 CA 2006
The courts appear to be backing this approach given the lack of significant case law on the point since these provisions came into force.
From January 2019 there is a requirement for certain companies (including all public listed companies) to make a s 172 statement in their accounts about how they have considered and met the duty over the year.
58
Section 173 CA 2006: Duty to exercise independent judgment
This duty codifies the principle that directors must exercise their powers independently, and not fetter their discretion other than in accordance with s 173(2) which states the duty is not infringed by a director acting:
(a) in accordance with an agreement entered into by the company that restricts the future exercise of discreation by its directors; or
(b) in a way authorised by its constitution.
They can rely on advice from others but must make their own judgments. Directors must be mindful of the individual nature of this duty when acting.
They cannot blindly follow others’ views without considering the interests of the company
59
Section 174 CA 2006: Duty to exercise reasonable care, skill and diligence
The level of care, skill and diligence which a director must exercise is assessed objectively and subjectively.
The required level is the level of skill, care and diligence which would be exercised by a reasonably diligent person with:
* the general knowledge, skill and experience that may reasonably be expected of someone in their role; and
* the general knowledge, skill and experience of that director.
The minimum standard expected of a director is that objectively expected of a director in that position. This standard may then be subjectively raised if the particular director has any special knowledge, skill and experience
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Summary
* In general, directors' duties are owed to the company and not to individual shareholders.
* The duties shift to the protection of the creditors in an insolvency.
* The duties under s 171 – 177 apply to all directors.
* The common law and equitable fiduciary duties apply to the extent not covered by CA 2006 and remain relevant in the interpretation of the statutory duties.
* The statutory directors' duties are set out in ss 171-177 CA 2006.
* Section 172 CA 2006 is the central duty and causes the most discussion.
61
Duties and responsibilities of directors II
This element will consider the duties owed to the company under s 175 – 177 and the consequences of breach of duty.
The next elements consider specific statutory restrictions on particular transactions involving directors: long term service contracts, substantial property transactions and loans and related transactions.
62
The general duties of directors ss 170 – 177 CA 2006
You will remember from the previous element that the general duties of directors are set out in sections 171-177 CA 2006 and are as follows:
* Duty to act within powers (s 171 CA 2006);
* Duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006);
* Duty to exercise independent judgment (s 173 CA 2006);
* Duty to exercise reasonable care, skill and diligence (s 174 CA 2006);
63
The general duties of directors ss 170 – 177 CA 2006
* Duty to avoid conflicts of interest (s 175 CA 2006);
* Duty not to accept benefits from third parties (s 176 CA 2006); and
* Duty to declare any interest in a proposed transaction (s 177 CA 2006).We covered the duties under s 171 – 174 in the previous element. This element covers the duties under 175 – 177 and remedies for breach of duty.
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Section 175 CA 2006: Duty to avoid conflicts of interest
This duty is the first of three duties aimed at dealing with conflicts of interest which directors might experience.
This duty requires a director to ‘avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.’
This is quite widely drafted and is said to apply ‘in particular to the exploitation of any property, information or opportunity’. It is no excuse for the director to say that the opportunity is not one which the company could have exploited itself.
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Section 175 CA 2006: Duty to avoid conflicts of interest
The duty is not infringed ‘if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest_’_ or if the conflict arises:
* in relation to a transaction with the company (eg a transaction between the director and the company) (s 175(3) CA 2006); or
* in relation to a matter which has been authorised by the directors (s 175(4)(b) CA 2006).
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Example s 175 duty:
X is a director of Company A and has been approached to become a director of Company B (Company A’s biggest competitor). This is a situation to which s 175 CA 2006 applies because there is an obvious potential conflict between the two companies. Board approval should be sought by X from both boards at the time the Company B directorship is entered into or, better still, X should refuse the appointment at Company B.
67
Example s 175 duty:
Note that s 175(3) CA 2006 expressly excludes conflicts of interest arising in relation to transactions or arrangements with the company. These conflicts are subject to the duty of disclosure in s 177 CA 2006 for transparency purposes but are not prohibited. This seems to be a statutory acknowledgement that many directors will have interests in other companies, and most companies' articles permit this, provided such interests are declared.
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Example s 175(3) exception
X is a director of Company A and a director of Company B (after approval by the Board of Company A). If Company B, at some point later, wish to sell an asset (eg a property) to Company A that is a s 175(3) CA 2006 situation which is an exception from the duty under s 175 CA 2006. In this instance the duty under s 177 CA 2006, which we will examine later in this element, will apply.
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Section 176 CA 2006: Duty not to accept benefits from third parties
This is the second of the three duties aimed at conflicts of interest. Under this section, a director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing (or not doing) anything as a director.
However, note that the duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest (s 176(4) CA 2006).
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Section 176 CA 2006: Duty not to accept benefits from third parties
Note that, unlike the duty in s 175 CA 2006, the other directors cannot authorise an arrangement under this section. There is no provision allowing them to do so. It would be possible for the shareholders to approve a director’s proposed action in advance or to ratify under s 239.
Example: A director accepting a bribe or making a profit at the company’s expense by virtue of their position of director, would clearly breach this duty. Their conflict of interest would be obvious.
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Section 177 CA 2006: Duty to declare an interest in a proposed transaction
This is the third of the three duties aimed at conflicts of interest. Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors. This covers indirect interests, as well as direct interests.
In addition to the duty under s 177 CA 2006 to disclose interests in proposed transactions entered into by the company, directors are also required to disclose interests in existing transactions or arrangements entered into by the company (s 182 CA 2006.
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Section 177 CA 2006: Duty to declare an interest in a proposed transaction
Example: If Company A is about to sign a contract with Company B, and a director of Company A also happens to be a shareholder in Company B, they will have an indirect interest in the transaction. The exception in s 175(3) applies so there is no breach of s 175. However, the director stands to gain from their personal shareholding in Company B, if Company A signs the contract. They must therefore tell the directors of Company A about their shareholding in Company B, before Company A signs the contract.
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Procedural Matters relating to s 177 CA 2006
* Note that s 177 CA 2006 applies equally to ‘indirect interests’. An indirect interest is not always easy to identify. Where a director has some interest whether through a spouse or another relative or through a company in which they are a member, the director is likely to be deemed to have an indirect interest. The director does not have to be party to the transaction for s 177 CA 2006 to apply.
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Procedural Matters relating to s 177 CA 2006
* A director must declare their interest in a proposed transaction before the transaction is entered (s 177(4) CA 2006, subject to anything different expressed in the articles).
* The declaration can be at a Board Meeting (s 177(2)(a) CA 2006) or in writing in advance of the Board Meeting (s 177(2)(b)(i) CA 2006). It is also possible for directors to give a one-off general notice of their interest (s 177(2)(b)(ii) CA 2006). Best practice suggests that an interested director will declare that interest at BM1.
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Procedural Matters relating to s 177 CA 2006
* If a director discloses an interest to the other directors by way of written notice rather than in a meeting of the directors, then the notice must be sent to all directors either electronically (if agreed) or in paper form (s 184 CA 2006).
* Under s 185, a director can give general notice to the effect that they are always to be considered interested in any transaction or arrangement with a specified party. This will be if a director has an interest in a specified body corporate or firm (s 185(2)(a) CA 2006) or is connected to a specified person (s 185(2)(b) CA 2006).
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When does a director NOT need to make a declaration pursuant to s 177 CA 2006?
Sections 177(5) and (6) CA 2006 set out when a director is not required to make a declaration; namely when:
* the director is not aware of the interest or transaction or arrangement in question (a director is treated as being aware of the interest or transaction/arrangement if it is a matter of which they ought reasonably to have been aware);
* the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about the conflict of interest; or
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When does a director NOT need to make a declaration pursuant to s 177 CA 2006?
* if the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board, or a committee of the board, of directors.
In practice, directors are likely to continue to declare their interests even if the other directors know or ought to have known about any conflict. This can easily be documented in the board minutes and avoids the need to rely on an exception that may or may not apply.
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Section 177 CA 2006 and MA 14
MA 14 specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement.
This could cause difficulties in small companies. However, MA 14(2) and (3) allow the conflicted director to count in the quorum and vote if:
* the company disapplies MA 14(1) each time the conflict arises by ordinary resolution;
* the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or
* the director’s conflict arises from a permitted cause (defined in MA 14(4)).
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Section 177 CA 2006 and MA 14
An alternative, and more permanent, measure would be to remove MA 14 under s 21 CA 2006 and replace it with an article expressly permitting a director interested in a transaction or arrangement with the company to vote and count in a quorum on board resolutions to approve the transaction or arrangement.
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Remedies for breach of directors’ duties
Directors owe their duties to the company, rather than to individual shareholders. If directors breach their duties, the company has a claim against them personally in law.
Under s 178 CA 2006, the consequences of a breach of directors’ duties are the same as for breach of the corresponding common law or equitable principles. With the exception of the duty to exercise reasonable care, skill and diligence (s 174 CA 2006), the statutory duties are enforceable in the same way as fiduciary duties owed by directors to their company.
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Section 174
The remedy for a breach of the duty of care, skill and diligence (s 174) is damages.
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Sections 171 – 173 and 175 – 177
Remedies for breaches of general duties other than s 174 include:
* injunction;
* setting aside of the transaction;
* restitution and account of profits;
* restoration of company property;
* damages.
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Shareholder approval in advance
Shareholders may support a director’s proposed action, and be prepared to approve it in advance, even though it would otherwise represent a breach of the general duties set out in ss 171-177 CA 2006. Note however that shareholders cannot approve unlawful acts in this way.
The statutory duties under CA 2006 are said to ‘have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors … that would otherwise be a breach of duty’ (s 180(4) CA 2006).
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Continuation of the common law approach
This represents a continuation of the common law approach.
Authorisation is only effective provided there has been full disclosure by the directors so that the shareholders are properly aware of the details of the action and can make an informed decision.
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Ratification for breach of duty
The shareholders can, by ordinary resolution, subject to anything in the company's articles requiring a higher majority or unanimity, under s 239(2) CA 2006, ratify (ie approve after the breach) the following conduct of directors:
* negligence;
* default;
* breach of duty; and
* breach of trust.
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Ratification for breach of duty
If a director holds shares in the company, then any votes to ratify their breach which attach to shares held by them or any person connected with them (eg their spouse, children, parents or a company which they control – see ss 252 and 253 CA 2006) will be disregarded under s 239(4) CA 2006.
Unlawful acts can never be ratified (eg declaring a dividend when no distributable profits are available) and shareholders cannot ratify a director’s breach of fiduciary duty in insolvency situations since directors owe their duties to creditors, not shareholders, once the company is insolvent.
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Summary
* Section 175 is the duty to avoid conflicts of interest. However, this does not apply where the conflict arises in relation to a transaction with the company (s 175(3)).
* Section 177 CA 2006 relates to the duty on directors to declare a direct or indirect interest in a proposed transaction. The duty to avoid a conflict of interests does not apply to interests in proposed transactions (s 175(3)).
* Section 177 CA 2006 will likely trigger the effects of MA14, unless a company has disapplied it or another exception applies.
* There are consequences, as set out under the common law, for breaches of duty.
* Shareholders can, in certain circumstances, approve in advance or ratify the conduct of directors.
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Directors’ long term service contracts
The next three elements consider particular transactions between companies and directors which are regulated by CA 2006 and which will require disclosure of an interest by a director together with shareholder approval in certain circumstances.
This element considers directors’ long term service contracts.
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Introduction: Transactions with Directors
On this module you will learn about three types of transaction between the company and its directors (or people connected to them) which are regulated by CA 2006 and which require the approval of the company's shareholders, in order for the transaction to be valid. The particular types of transaction are:
Directors' long-term service contracts (ss 188 – 189 CA 2006)
Substantial property transactions (ss 190 – 196 CA 2006)
Loans, quasi-loans and credit transactions (ss 197 – 214 CA 2006)
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Introduction: Transactions with Directors
In these transactions there is a real risk of conflict between the interests of the directors and the shareholders. If the directors proceeded with any of these transactions without obtaining shareholder approval, then they would be in breach of their general duties under s 171 – 177 CA 2006, as well as in breach of the requirements above.
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Directors' long-term service contracts (s 188 CA 2006)
Under s 188(2)(a) CA 2006 (combined with s 281(3) CA 2006)), shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (referred to as the ‘guaranteed term’). The guaranteed term applies to either:
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Directors' long-term service contracts (s 188 CA 2006)
* a period during which the contract is to continue other than at the instance of the company (ie a contractual term of more than two years or where the director is in control of how long the contract continues) (s 188(3)(a)(i) CA 2006), and
* during this time the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)(a)(ii) CA 2006).
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Directors' long-term service contracts (s 188 CA 2006)
* OR the period of notice to be given by the company (s 188(3)(b) CA 2006).
It will also apply to an aggregate of any periods covered by either s 188(3)(a) or (b).
Note that s 188(2)(b) CA 2006 also makes it clear that if the director is also a director of any holding company, the shareholders of the holding company will also need to give approval.
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Consequences of non-compliance: s 189 CA 2006
If a company agrees to a provision in a service contract in contravention of s 188 CA 2006, the consequences are as follows:
* the provision will be void to the extent of the contravention under s 189 CA 2006, and
* the contract will be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.
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Section 188(3) CA 2006 example
If a company is unable to terminate a director’s service contract for the first 18 months of the term and thereafter has to give a minimum of nine months’ notice to terminate, this contract will fall within s 188(3) because the aggregate period of the two provisions is in excess of two years.
Such a contract will need to be approved by an ordinary resolution.
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Exception: Section 188(6)(b) CA 2006 example
Under s 188(6)(b) CA 2006 approval is not required by the members of any company which is a wholly owned subsidiary of another company.
HoldCo Plc owns 100% of the shares in Subsidiary Ltd.
Subsidiary Ltd has a proposed new service contract with guaranteed term of more than 2 years with one of its directors.
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Exception: Section 188(6)(b) CA 2006 example
In this example, even though it appears from s 188(2)(a) CA 2006 that Subsidiary Limited would need to obtain approval from the shareholders (ie the single SH, being HoldCo Plc) for the proposed new service contract for the director of Subsidiary Limited because it has a guaranteed term of more than 2 years, the fact that Subsidiary Limited is a wholly-owned subsidiary means that the approval is not required.
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Section 188 CA 2006 and Disclosures
Disclosure of Interest – s 177 CA 2006
Under s 177(6)(c) CA 2006, a director is not required to disclose their interest in the service contract. However, it is likely to remain the practice that directors will continue to make the declaration of interest under s 177(1) CA 2006 so that it is documented in the board minutes.
In addition, the director will not be permitted to vote or count in the quorum on any board resolution relating to the contract (MA 14(1)).
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Members’ inspection rights of all directors’ service contracts - s 228 CA 2006
A company must keep a copy of all directors' service contracts (or, where the contracts are not in writing, memoranda of their terms) at the company's registered office or a place specified in regulations made under s 1136 CA 2006 for a period of at least one year from the date of termination or expiry of the contract for members to inspect. This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months. Under s 229 CA 2006 members have the right to inspect without charge or to request a copy on payment of a fee.
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Section 188 CA 2006: Procedural Issues
Where the ordinary resolution is to be passed at a General Meeting, s188(5)(b) CA 2006 sets out that a memorandum setting out the proposed contract must be made available for inspection by members of the company both:
a) at the company’s registered office for not less than 15 days ending with the date of the meeting; and
b) at the meeting itself.
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Section 188 CA 2006: Procedural Issues
A minimum of 15 days’ notice of the GM held to approve the contract will therefore have to be given to shareholders (even if the short notice procedure is followed) unless the written resolution procedure is used. You can see that this will impact on the speed with which the decision to approve the service contract or not can be made. There is no such 15-day requirement for a written resolution.
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Where the written resolution procedure is being followed
pursuant to s 188(5)(a) CA 2006, the memorandum setting out the proposed contract must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.
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Summary
* Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (s 188(2)(a) CA 2006).
* The guaranteed term is the period during which the contract is to continue other than at the instance of the company where the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)).
* In the absence of approval the term will be void and the contract deemed to terminate on reasonable notice (s 189).
* Under s 188(6)(b) approval is not required by the members of any company which is a wholly owned subsidiary of another company.
* If the director is also a director of any holding company, the shareholders of the holding company will also need to give approval (s 188(2)(b)).
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Substantial property transactions
This element considers substantial property transactions between companies and their directors (or directors of the holding company or connected persons).
The next element considers loans and related transactions.
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Substantial property transactions (s 190 – 196 CA 2006)
Section 190 CA 2006 governs an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.
These types of transaction are permitted but again require shareholder approval by ordinary resolution.
Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.
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Section 190 CA 2006: Substantial Non-Cash Asset
‘Non-Cash Asset’ means any property other than cash (s 1163 CA 2006).
‘Substantial’ is defined in s 191 CA 2006 as follows:
* An asset worth £5,000 or less is not a substantial asset.
* An asset worth more than £100,000 is a substantial asset.
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Section 190 CA 2006: Substantial Non-Cash Asset
* An asset worth more than £5,000, but not more than £100,000 is a substantial asset only if it is worth more than 10% of the company’s net asset value. A company’s net asset value is that shown in its most recent statutory accounts.
If the company is only recently incorporated and no accounts have yet been prepared, then the net asset value is taken to be the amount of the company's called up share capital.
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Connected persons – s 252 – 254 CA 2006
The definition of ‘persons connected with a director’ is set out in ss 252–254 CA 2006. The definition is complex and where you suspect that a connected person may be involved, you should always check the details of the legislation. However, in summary, the key categories of connected persons are:
Members of the director's family: spouse or civil partner, parents, children or step-children (s 253(2)). Note that brothers, sisters, grandparents, grandchildren, uncles and aunts are NOT connected persons under CA 2006.
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Connected persons – s 252 – 254 CA 2006
Bodies corporate ie companies in which the director (and others connected with them) holds 20% or more of the shares (s 254).
A business partner of the director or those connected with them (s 252(2)(d)).
Trustees of a trust the beneficiaries of which include the director or those connected with them (s 252(2)(c)).
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Example
Question:
XYZ Ltd is to sell a property to C (wife of A who is a director of XYZ Ltd) for £109,000. XYZ Ltd’s net asset value is £2 million. Is this a substantial property transaction?
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Answer
Yes. The asset is a substantial non-cash asset ie property so falling within the s 1163 definition of being non-cash. It is a transaction between the company (XYZ Ltd) and a person connected to its director (A's wife, C) and the value of the property is substantial.
Even though £109,000 does not exceed 10% of the company’s net asset value, it is automatically deemed to be substantial as the value exceeds £100,000.
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Holding company
Section 190(2) CA 2006 states that if the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.
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Exceptions
Under s 190(4)(b), approval is not required by the members of any company which is a wholly-owned subsidiary of another company. This is exactly the same rule that you saw in relation to a director’s long-term service contract (s 188).
In addition, there are a list of limited exceptions in s 192 CA 2006. If the arrangement falls within the list of transactions within this section, it will not require shareholder approval. For example, if a director who is also a shareholder sells their shares back to the company, this transaction will not be a SPT because it falls under s 192(a) as a transaction between a company and a person in their capacity as a shareholder.
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Remedies (s 195 CA 2006)
Where a SPT is entered into without shareholder approval, under s 195(2) CA 2006 the transaction is voidable at the instance of the company unless:
(a) restitution is no longer possible,
(b) the company has been indemnified for the loss or damage suffered by it, or
(c) rights acquired in good faith by third party would be affected by the avoidance.
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Remedies (s 195 CA 2006)
The directors involved (and those so connected under s 195(4) CA 2006) are liable to account to the company for any profits made and to indemnify the company for any loss incurred s 195(3) CA 2006.
Section 196 CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If the transaction is affirmed, the arrangement may no longer be avoided under s 195 CA 2006.
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Defences (s 195 CA 2006)
If the SPT is between a company and a person connected with a director, and the director concerned shows that they took all reasonable steps to ensure the company’s compliance with s 190 CA 2006, the director will not be liable under s 195(6) CA 2006.
There is also a defence under s 195(7) CA 2006 for any connected person (if relevant) and any director who authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.
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Sections 190 & 177 CA 2006
Under s 177(1) CA 2006 a director would need to disclose the nature and extent of their interest to the board.
Under the exception in s177(6)(b) CA 2006, it is arguable that an interested director need not formally to declare an interest if the other directors are already aware of it. However, it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes.
Under MA 14(1), any interested directors will not be permitted to vote on the board resolutions to approve the contract and authorise a signatory. They cannot count in the quorum for board resolutions regarding the contract either.
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Summary
* Shareholder approval by ordinary resolution is required where there is an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.
* Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.
* ‘Substantial non-cash asset’ means an asset other than cash where the value is either: over £5,000 and equates to more than 10% of the company’s net asset value; or over £100,000.
* If the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR (s 190(2)).
* Approval is not required by the members of any company which is a wholly-owned subsidiary of another company (s 190(4)(b)).
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Loans and related transactions with directors
This element considers loans and related transactions between the company and its directors, directors of its holding company and connected persons.
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Introduction: Loans to directors (s 197 – 214 CA 2006)
Company loans to directors, holding company directors and connected persons, although permitted, may also be subject to the requirement of shareholder approval by ordinary resolution.
The restrictions set out in this part of CA 2006 apply to four different types of transaction:
Loans – where the company lends money to a director (197 CA 2006);
Quasi-loans – as defined in s 199 CA 2006. An example of a quasi-loan would be where a company agreed to pay off an outstanding account owed by a director to a third party on the understanding that the director would later reimburse the company;
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Introduction: Loans to directors (s 197 – 214 CA 2006)
Credit Transactions – as defined in s 202 CA 2006. A credit transaction includes any transaction entered into between the company and the director where the company provides goods or services on a credit basis which will be paid for at a later date. Only the company and the director will be parties to this arrangement; and
Guarantees or the provision of security for any of the above – eg where a director obtains a loan from a bank and their company stands as guarantor for the repayment of the loan or the company provides the bank with security over its assets.
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Which companies are restricted?
For these restrictions, it is important to distinguish between private companies (not associated with a PLC) on the one hand, and public companies and private companies that are associated with public companies on the other. Under s 256 CA 2006, companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate.
So, for example, a private company that is a subsidiary of a public company will be associated with the public company for these purposes.
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Which companies are restricted?
You will see that private companies (not associated with a Plc) are subject to much less regulation than Plcs (or companies associated with Plcs).
All companies (s 197): Loans, guarantees or security for directors
No company may make loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors, without the transaction first being approved by the shareholders by ordinary resolution. If the company in question is a private company that is not associated with a public company, these are the only transactions for which shareholder approval is required under the CA 2006 loan provisions.
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Which companies are restricted?
Public companies and private companies associated with public companies (s 198 – 202): Quasi loans, credit transactions and connected persons
These companies also require shareholder approval for:
* Loans to a person connected to a director of the company or a director of its holding company (s 200);
* Quasi-loans (s 198) to, or credit transactions (s 201) with their directors and directors of a holding company or persons connected with such directors; and
* Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors (s 197, 198, 200, 201).
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Examples
ALL COMPANIES
Loans (s 197)
A loan is a straightforward lending of money. For example, a company wishes to lend one of its directors £50,000 to assist with the costs of training.
Guarantees or security (s 197)
A guarantee or security is where the company provides a guarantee or gives security in relation to a loan provided to one of its directors by a third party eg a bank. For example, a director wishes to borrow £100,000 from a bank and the bank requests the company to guarantee the loan.
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COMPANIES ASSOCIATED WITH A PLC ONLY Quasi loans (s 198)
A quasi-loan is a transaction under which the company agrees to pay a sum to a third party on behalf of the director on terms that the director will reimburse the company. For example, a company wishes to pay a third party for the cost of building work on the home of one of its directors, on the basis that the director will repay the money at a later date or in instalments.
Credit transactions (s 201)
A credit transaction is where the company provides goods or services in the normal course of its business to one of its directors on the basis that the director will pay for the goods and services at a later date or in instalments. For example, a building company builds an extension for one of its directors on credit terms.
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Exceptions (s 204 – 209 CA 2006)
There are a number of exceptions to the requirement for shareholder approval, the details of which are set out in s 204 – 209 CA 2006. These are as follows:
* Section 204: Expenditure on company business (up to a maximum of £50,000);
* Section 205: Loans for defending proceedings brought against a director;
* Section 206: Loans for defending regulatory actions or investigations;
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Exceptions (s 204 – 209 CA 2006)
* Section 207: Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;
* Section 208: Intra group transactions, and
* Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).
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Remedies (s 213 CA 2006)
If shareholder approval is not obtained and no exceptions apply, the consequences are set out in s 213 CA 2006. These are very similar to the consequences for breach of s 190 CA 2006, set out earlier. In relation to the transaction, the consequences are set out in s 213(2) CA 2006: the arrangement is voidable at the instance of the company unless:
(a) restitution is no longer possible,
(b) the company has been indemnified for the loss or damage suffered by it, or
(c) rights acquired in good faith by a third party would be affected by the avoidance.
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Remedies (s 213 CA 2006)
The directors involved (and those so connected under s 213(4) CA 2006) are liable to account to the company for any profits made and to indemnify the company for any loss incurred (s 213(3) CA 2006).
Section 214 CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If it is affirmed, the arrangement may no longer be avoided under s 213 CA 2006.
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Defences?
If a transaction contravenes ss 200, 201 or 203 CA 2006 and is entered into with a person connected with a director, that director will not be liable if they took all reasonable steps to ensure the company complied with those sections (s 213(6) CA 2006).
There is also a defence under s 213(7) CA 2006 for any connected person (if relevant) and any director that authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.
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Holding Company
As with s 190 CA 2006, if the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.
Wholly-owned subsidiary Exemption
As with both ss 188 and 190 CA 2006 approval is not required by the members of any company which is a wholly-owned subsidiary of another company.
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Disclosures under s 177 CA 2006
Again, under s 177(1) a director would need to disclose the nature and extent of their interest to the board if they were interested in any of the transactions caught by ss 197-202 CA 2006.
Pursuant to s 177(6)(b) CA 2006, it is arguable that an interested director need not formally declare an interest if the other directors are already aware of it. However, it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes. In addition, it will not always be obvious to the rest of the Board if the director has an indirect interest in a transaction, so directors should be advised to act cautiously.
Under MA14(1), any interested directors will not permitted to vote on the board resolutions to approve the transaction and authorise a signatory because it is “a... transaction…with the company in which [they] are interested”. They cannot count in the quorum for board resolutions regarding the contract either.
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Sections 197 - 201: Procedural issues
Where the ordinary resolution is to be passed at a General Meeting, a memorandum setting out the proposed transaction must be made available for inspection by members of the company both:
a) at the company’s registered office for not less than 15 days ending with the date of the meeting; and
b) at the meeting itself.
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Sections 197 - 201: Procedural issues
A minimum of 15 days’ notice of the general meeting held to approve the transaction will therefore have to be given to shareholders (even if the short notice procedure is followed) unless the written resolution procedure is used. You can see that this will impact on the speed with which the decision to approve the transaction or not can be made.
Where the written resolution procedure is being followed, a memorandum setting out the proposed transaction must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.
You will find these rules within the relevant statutory authority for each transaction.
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Summary of transactions between companies and their directors
CA 2006 regulates various transactions between companies and directors, eg:
* Directors' long-term service contracts (ss 188 – 189)
* Substantial property transactions (ss 190 – 196)
* Loans, quasi-loans and credit transactions (ss 197 – 214)
All of these transactions require the approval of shareholders by way of ordinary resolution unless any of the exceptions apply.
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Summary of transactions between companies and their directors
Note that if a company is a wholly-owned subsidiary of another company, it is exempt from the requirement to obtain shareholder approval.
The remedies for breach of the requirements of shareholder approval differ depending on which transaction is involved. Details are found in the relevant statutory sections.
If a company wishes to seek approval for one of these transactions it will need to follow the procedural requirements.
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Summary
* For private limited companies which are not associated with a Plc, the only relevant provision is s 197 which provides that an ordinary resolution is required to approve loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors.
* Plcs and private limited companies which are associated with Plcs are subject to further restrictions relating to loans to a person connected to a director of the company / holding company; quasi-loans to, or credit transactions with, their directors / directors of a holding company / connected persons and guarantees or security in respect of any of these transactions (s 198 – 202).
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