Directors

I. Introduction
Article 3 MA: Directors' general authority
Article 4 MA: Shareholders' reserve power

Directors' general duties: s.170-177

· Duty to promote the success of the company
· Duty to exercise independent judgement
· Duty to exercise reasonable care, skill and diligence, and
· Duty to avoid conflicts of interests

II. Disclosure
Disclosure of identity of directors and secretary
- Companies are required to disclose certain information concerning their directors and secretary
to the public generally.

· Directors: s.162-164
~ s.162: Register of directors
~ s.163: Individuals
--> s.163(1)(b): only register a service address.
--> s.165: company keeps a separate register for a director's residential address
(Not open to public inspection) (Does not applies to secretaries)
~ s.164: Corporate directors and firms
~ s.167: Requirement for registration-Duty to notify registrar of changes (14 days)

· Secretaries: s.275-278
~ s.275: Duty to keep register of secretaries
--> s.275(5): only register a service address.
~ s.276: Requirement for registration-Duty to notify registrar of changes
~ s.277: Individuals
~ s.278: Corporate secretaries and firms

Inspection:
· At companies house: available to any person, s. 1085(1)
· At Company's registered office:
· ~ Open for inspection by any member of a company without charge
· ~ By any person on payment of a fee:
· # s.162(5), directors
· # s.275(5), secretaries.

Disclosure required in notes to annual accounts

· Directors' benefits
· ~ s.412: directors' (and past directors') remuneration
· --> Small Companies and Group (Accounts and Director's Report) Regulations 2008,
· Large and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008:
· # Directors' salaries, bonus payments and pension entitlements;
· # Compensation paid to directors and past directors for loss of office.
 · Also applies to any payments made to, or receivable by, a person connected to such
a director or a body corporate controlled by a director.

· ~ s.413: 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. Applies to
person who was a director at any time during the applicable financial year.
· ~ s.423(1): every company must send a copy of its annual accounts to every member of the
company.

S.177: Directors to disclose interest in PROPOSED transactions or arrangements

Duty of a director of a company who is in any way, whether directly or indirectly, interested in a
proposed transaction or arrangement with the company to declare the nature and extent of that
interest to the other directors of the company.

<1> Direct or indirect interest:

~ Direct interest: e.g., a service contract between an director and the company = the director's
interest in securing as high a salary as possible is likely to conflict with the company's interests.
~ Indirect interest: through a spouse or another relative or through a company in which he is a
member.
# Re British American Corporation.

<2> When must the interest in the contract be disclosed:

S.177(4): a declaration must be made before the company enters into the transaction or
arrangement.

Exceptions:
<3> When does a director not need to make a declaration?

S.177(5) and (6): a director is not required to make a declaration when:

~ the director is not aware of the interest or transaction or arrangement in question
~ it is unlikely that it would give rise to a conflict of interest / unlikely that other directors know
about or ought to have known about a conflict of interests;
~ if the conflict arises because it concerned his service contracts and his service contract has been
or will be considered by the board of directors.

In practice directors are likely to continue to declare their interest even if the other directors know
or ought to have known about any conflict.

<4> Written notice

S. 184: if written notice (rather than in a meeting of directors), notice must be sent to all directors.

<5> General notice

S.185: a director can give general notice to the effect that he is always to be considered interested
in any transaction or arrangement with a specified party.
~ s.185(2)(a): interest in a specified body corporate;
~ s.185(2)(b): director is connected to a specified person.

S.185(3): the general notice must state the nature and extent of the director's interest in the body
corporate or firm or the nature of his connection with the person.

Consequences of non-disclosure:
==> Same as for failure to comply with any of the general duties of directors under s.170-177
(same as would apply under the corresponding common law rule or equitable principle).

S.177: Directors to disclose interest in EXISTING transactions or arrangements

Same as s.177 except:

<1> S.182(4): an interest in an existing transaction or arrangement should be disclosed as soon as is
reasonably practicable.

<2> Consequences of non-disclosure:

The disclosure requirement under s.182 is not a duty (unlike under s.177).
A director who fails to comply with s.182 will have committed a criminal offence and could be
liable to a fine under s.183. The contract will not be affected.

Applies equally to sole directors of a company and shadow directors.

See s.186 and 187

Article 14 Model Articles

A director who is interested in a transaction or arrangement with the company cannot vote or count
in the quorum for a board meeting.

Solving the Article 14 problem: Exception (small company)

Disapply by OR – Article 14(3) MA

Articles 14(2) and (3) allow the conflicted director to count in the quorum and vote if:
- the company disapplies Article 14(1) by ordinary resolution;
- the director's interest cannot reasonably be regarded as likely to give rise to a conflict
of interest;
- the director's conflict arises from a permitted cause 9defined in Article 14(4))

Alternative:
Remove the Article by SR: s.21 CA 2006 (assuming the provisions are not entrenched, s22)

Service contract

Keep copy (or memorandum) at registered office

Copies and memoranda must be open to inspection by any member without charge : s.229(1)
Members can request a copy subject to a fee: s.229(2)

S.227: definition of a service contract. Applies to a person's appointment as a director and any
contracts for services.

S.230: requirements relating to service contracts apply equally to shadow directors.

Members' approval of directors service contracts

S.188: shareholder approval is required if the guaranteed term is over 2 years.
Where:

· Contractual term of 2 years or more;

 OR
· Director can extend the period to beyond 2 years without the company's permission; and
· Company has limited ability to terminate during that time: s.188(3)(a) (“rolling contract”)
OR
· Notice period is 2 years or more.
Also applies to an aggregate of s.188(3)(a) and s.188(3)(b) (e.g.: term is 18 months + notice is 9
months).

S.188(5): a memorandum on the proposed contract must be made available to all members before
the resolution can be passed.

S.188(6)(b): approval is not required by the members of any company which is a wholly-owned
subsidiary of another company.

Consequences of non-compliance:
The provision will be void. The contract will be deemed to contain a term entitling the company to
terminate it at any time by the giving of reasonable notice.

III. Substantial Property Transactions (s.190)

Director/Connected person + Non-cash asset + Substantial

Substantial Property Transactions (s.190):

Director of company or holding company, or connected person
buys from / sells to
Company

Connected person: ss.252-256 :

~ a member of the directors family (spouse, civil partner, child or step child or parent of the
director) (eg; not a nephew), OR
~ a company with which the director is associated (a company in which the director and his
connected persons own at least 20% of the share capital), OR
~ a trustee of a trust in which the director or a person connected to a director have an interest, OR
~ a person acting in the capacity of a partner of the director, or of a person connected to a director.

Non-cash asset (s.1163): “any property or interest in property other than cash”.

Substantial (s191):

Less than £5,000: not substantial asset

More than £100,000: substantial asset

Between £5,000 and £100,000 : if the asset is worth more than 10% of the company's net asset
value.
(If the company is only recently incorporated and not accounts have yet been prepared than the net
asset value is taken to be the amount of the company's called up share capital).
Sanction: if the directors do not obtain shareholder approval
Transaction is voidable by the company (s.195) unless:
~ Restitution is non longer possible, or
~ The company has been indemnified by another person for the loss or damage suffered by it; or
~ Bona fide rights have been acquired by a third party who was not a party to the transaction.

S.196: shareholders can affirm the arrangement by ordinary resolution.

S.195(3): Irrespective whether the transaction has been avoided, the director (and the person
connected to the director, if relevant) and any other director who authorised the arrangement is
liable to account to the company for any gain made directly or indirectly out of the transaction, and
to indemnify the company for any loss or damage resulting from the transaction.

Defence/exemption:
# If the transaction is between a company and a person connected with a director, and the director
concerned took all reasonable steps to ensure the company's compliance with s.190, the director
will not be liable under s.195(6).

# S.195(7) : if a person can show he had no knowledge of the circumstances constituting the
contravention.

# S.190(4)(b): wholly owned companies: approval is not required by the members of any company
which is a wholly-owned subsidiary of another company.

IV. Loans to directors

General rule: shareholder approval is required before a company can make a loan to a director.
Prior to approval, a written memorandum must be made available to members, setting out:
~ the nature of the transaction,
~ the amount and purpose of the loan and
~ extent of the company's liability

Transactions caught:
Loans (s.197 and s.200)
Quasi-loans (ss. 198 – 200): s.199
Credit transaction (ss. 201 – 202): s.202
Guarantee or the provision of any form of security (ss. 197, 198, 200 and 201)

Which companies are restricted:

For private companies:

Shareholders to approve a loan to be made to a director (or a security being given to a third party
making a loan to that director)
(For private companies, nothing on quasi-loans and credit transactions).

For public companies (or a company associated with a public company), shareholders' approval
needed for:
~ a loan to be made to a director (or a security being given to a third party making a loan to that
director); or
~ a loan to be made (or security given with respect) to a connected person to that director
(“connected person”: s.252); or
~ a quasi-loan to a director or a connected person; or
~ a credit transaction with the director or a connected person; or
~ guarantee a security for those transactions.

S.256: If a private company is part of a group:

if there is a plc within the group then all the other companies in that group are associated with that
plc.

S.197(5)(b): approval is not required by the members of any company which is a wholly-owned
subsidiary of another company.

Exceptions: shareholder approval is not required for:

# S.204: Expenditure on company business (limit: £50,000)

# S.205: Expenditure on defending proceedings : where a company is providing funds for a director
to defend proceedings in connection with any alleged negligence, default, breach of duty and
breach of trust in relation to the company or an associated company (s.661(3) and (4), s.1157)
# S.207: Minor and business transactions:
~ Loans or quasi-loans to a director (or, s.200: a person connected to a director): up to £10,000
~ Credit transactions: up to £15,000
# S.209 Loans / quasi-loans by a money-lending company (to any person provided it does so under
normal business terms).

Sanctions for non-compliance:

S.213: transaction voidable unless:
~ Restitution is non longer possible, or
~ The company has been indemnified by another person for the loss or damage suffered by it; or
~ Bona fide rights have been acquired by a third party who was not a party to the transaction.

V. Directors' duties regarding conflicts of interest

# Requirement to declare an interest in proposed transactions or arrangements under s.177

# Duty to avoid conflicts(s.175)

# Duty not to accept benefits from third parties (s.176)
--> 2 exceptions:
~ for s.175 and 176: if the situation or benefit cannot reasonably be regarded as likely to
give rise to a conflict;
~ for s.175 only: if the potential conflict is authorised by the directors (excluding the
potentially conflicted director).

Further exception: s.180(2) :

if a transaction needs shareholder approval, and shareholder approval is properly obtained.
==> the director does not have to be concerned with a potential conflict under s.175.