Company Law Reform Bill [HL]

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Company Law Reform Bill [HL]

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 2 — General duties of directors
71

161
Duty to avoid conflicts of interest
(1)
A director of a company must avoid a situation in which he has, or can have, a
direct or indirect interest that conflicts, or possibly may conflict, with the
interests of the company.
(2)
This applies in particular to the exploitation of any property, information or
5
opportunity (and it is immaterial whether the company could take advantage
of the property, information or opportunity).
(3)
This duty does not apply to a conflict of interest arising in relation to a
transaction or arrangement with the company.
(4)
This duty is not infringed—
10
(a)
if the situation cannot reasonably be regarded as likely to give rise to a
conflict of interest; or
(b)
if the matter has been authorised by the directors.
(5)
Authorisation may be given by the directors—
(a)
where the company is a private company and nothing in the company’s
15
constitution invalidates such authorisation, by the matter being
proposed to and authorised by the directors; or
(b)
where the company is a public company and its constitution includes
provision enabling the directors to authorise the matter, by the matter
being proposed to and authorised by them in accordance with the
20
constitution.
(6)
The authorisation is effective only if—
(a)
any requirement as to the quorum at the meeting at which the matter is
considered is met without counting the director in question or any
other interested director, and
25
(b)
the matter was agreed to without their voting or would have been
agreed to if their votes had not been counted.
(7)
Any reference in this section to a conflict of interest includes a conflict of
interest and duty and a conflict of duties.
162
Duty not to accept benefits from third parties
30
(1)
A director of a company must not accept a benefit from a third party conferred
by reason of—
(a)
his being a director, or
(b)
his doing (or not doing) anything as director.
(2)
A “third party” means a person other than the company, an associated body
35
corporate or a person acting on behalf of the company or an associated body
corporate.
(3)
Benefits received by a director from a person by whom his services (as a
director or otherwise) are provided to the company are not regarded as
conferred by a third party.
40
(4)
This duty is not infringed if the acceptance of the benefit cannot reasonably be
regarded as likely to give rise to a conflict of interest.
(5)
Any reference in this section to a conflict of interest includes a conflict of
interest and duty and a conflict of duties.

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 2 — General duties of directors
72

163
Duty to declare interest in proposed transaction or arrangement
(1)
If a director of a company is in any way, directly or indirectly, interested in a
proposed transaction or arrangement with the company, he must declare the
nature and extent of that interest to the other directors.
(2)
The declaration may (but need not) be made—
5
(a)
at a meeting of the directors, or
(b)
by notice to the directors in accordance with—
(i)
section 170 (notice in writing), or
(ii)
section 171 (general notice).
(3)
If a declaration of interest under this section proves to be, or becomes,
10
inaccurate or incomplete, a further declaration must be made.
(4)
Any declaration required by this section must be made before the company
enters into the transaction or arrangement.
(5)
This section does not require a declaration of an interest of which the director
is not aware or where the director is not aware of the transaction or
15
arrangement in question.

For this purpose a director is treated as being aware of matters of which he
ought reasonably to be aware.
(6)
A director need not declare an interest—
(a)
if it cannot reasonably be regarded as likely to give rise to a conflict of
20
interest;
(b)
if, or to the extent that, the other directors are already aware of it (and
for this purpose the other directors are treated as aware of anything of
which they ought reasonably to be aware); or
(c)
if, or to the extent that, it concerns terms of his service contract that have
25
been or are to be considered—
(i)
by a meeting of the directors, or
(ii)
by a committee of the directors appointed for the purpose under
the company’s constitution.
Supplementary provisions
30
164
Civil consequences of breach of general duties
(1)
The consequences of breach (or threatened breach) of sections 157 to 163 are the
same as would apply if the corresponding common law rule or equitable
principle applied.
(2)
The duties in those sections (with the exception of section 160 (duty to exercise
35
reasonable care, skill and diligence)) are, accordingly, enforceable in the same
way as any other fiduciary duty owed to a company by its directors.
165
Cases within more than one of the general duties

Except as otherwise provided, more than one of the general duties may apply
in any given case.
40

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 2 — General duties of directors
73

166
Consent, approval or authorisation by members
(1)
In a case where—
(a)
section 161 (duty to avoid conflicts of interest) is complied with by
authorisation by the directors, or
(b)
section 163 (duty to declare interest in proposed transaction or
5
arrangement) is complied with,

the transaction or arrangement is not liable to be set aside by virtue of any
common law rule or equitable principle requiring the consent or approval of
the members of the company.

This is without prejudice to any enactment, or provision of the company’s
10
constitution, requiring such consent or approval.
(2)
The application of the general duties is not affected by the fact that the case also
falls within Chapter 4 (transactions requiring approval of members), except
that where that Chapter applies and—
(a)
approval is given under that Chapter, or
15
(b)
the matter is one as to which it is provided that approval is not needed,

it is not necessary also to comply with section 161 (duty to avoid conflicts of
interest) or section 162 (duty not to accept benefits from third parties).
(3)
Compliance with the general duties does not remove the need for approval
under any applicable provision of Chapter 4 (transactions requiring approval
20
of members).
(4)
The general duties—
(a)
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, or any of them, that would otherwise be a breach of
25
duty, and
(b)
where the company’s articles contain provisions for dealing with
conflicts of interest, are not infringed by anything done (or omitted) by
the directors, or any of them, in accordance with those provisions.
(5)
Otherwise, the general duties have effect (except as otherwise provided or the
30
context otherwise requires) notwithstanding any enactment or rule of law.
167
Modification of provisions in relation to charitable companies
(1)
In their application to a company that is a charity, the provisions of this
Chapter have effect subject to this section.
(2)
Section 161 (duty to avoid conflicts of interest) has effect as if—
35
(a)
for subsection (3) (which disapplies the duty to avoid conflicts of
interest in the case of a transaction or arrangement with the company)
there were substituted—
“(3)
This duty does not apply to a conflict of interest arising in
relation to a transaction or arrangement with the company if or
40
to the extent that the company’s articles allow that duty to be so
disapplied, which they may do only in relation to descriptions
of transaction or arrangement specified in the company’s
articles.”;
(b)
for subsection (5) (which specifies how directors of a company may
45
give authority under that section for a transaction or arrangement)

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 3 — Declaration of interest in existing transaction or arrangement
74

there were substituted—
“(5)
Authorisation may be given by the directors where the
company’s constitution includes provision enabling them to
authorise the matter, by the matter being proposed to and
authorised by them in accordance with the constitution.”.
5
(3)
Section 166(2)(b) (which disapplies certain duties under this Chapter in
relation to cases excepted from requirement to obtain approval by members
under Chapter 4) applies only if or to the extent that the company’s articles
allow those duties to be so disapplied, which they may do only in relation to
descriptions of transaction or arrangement specified in the company’s articles.
10
(4)
After section 26(5) of the Charities Act 1993 (c. 10) (power of Charity
Commission to authorise dealings with charity property etc) insert—
“(5A)
In the case of a charity that is a company, an order under this section
may authorise an act notwithstanding that it involves the breach of a
duty imposed on a director of the company under Chapter 2 of Part 10
15
of the Company Law Reform Act 2006 (general duties of directors).”.
(5)
This section does not extend to Scotland or Northern Ireland.
Chapter 3
Declaration of interest in existing transaction or arrangement
168
Declaration of interest in existing transaction or arrangement
20
(1)
Where a director of a company is in any way, directly or indirectly, interested
in a transaction or arrangement that has been entered into by the company, he
must declare the nature and extent of the interest to the other directors in
accordance with this section.

This section does not apply if or to the extent that the interest has been declared
25
under section 163 (duty to declare interest in proposed transaction or
arrangement).
(2)
The declaration must be made—
(a)
at a meeting of the directors, or
(b)
by notice in writing (see section 170), or
30
(c)
by general notice (see section 171).
(3)
If a declaration of interest under this section proves to be, or becomes,
inaccurate or incomplete, a further declaration must be made.
(4)
Any declaration required by this section must be made as soon as is reasonably
practicable.
35

Failure to comply with this requirement does not affect the underlying duty to
make the declaration.
(5)
This section does not require a declaration of an interest of which the director
is not aware or where the director is not aware of the transaction or
arrangement in question.
40

For this purpose a director is treated as being aware of matters of which he
ought reasonably to be aware.
(6)
A director need not declare an interest under this section—

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 3 — Declaration of interest in existing transaction or arrangement
75

(a)
if it cannot reasonably be regarded as likely to give rise to a conflict of
interest;
(b)
if, or to the extent that, the other directors are already aware of it (and
for this purpose the other directors are treated as aware of anything of
which they ought reasonably to be aware); or
5
(c)
if, or to the extent that, it concerns terms of his service contract that have
been or are to be considered—
(i)
by a meeting of the directors, or
(ii)
by a committee of the directors appointed for the purpose under
the company’s constitution.
10
169
Offence of failure to declare interest
(1)
A director who fails to comply with the requirements of section 168
(declaration of interest in existing transaction or arrangement) commits an
offence.
(2)
A person guilty of an offence under this section is liable—
15
(a)
on conviction on indictment, to a fine;
(b)
on summary conviction, to a fine not exceeding the statutory
maximum.
170
Declaration made by notice in writing
(1)
This section applies to a declaration of interest made by notice in writing.
20
(2)
The director must send the notice to the other directors.
(3)
The notice may be sent in hard copy form or, if the recipient has agreed to
receive it in electronic form, in an agreed electronic form.
(4)
The notice may be sent—
(a)
by hand or by post, or
25
(b)
if the recipient has agreed to receive it by electronic means, by agreed
electronic means.
(5)
Where a director declares an interest by notice in writing in accordance with
this section—
(a)
the making of the declaration is deemed to form part of the proceedings
30
at the next meeting of the directors after the notice is given, and
(b)
the provisions of section 231 (minutes of meetings of directors) apply as
if the declaration had been made at that meeting.
171
General notice treated as sufficient declaration
(1)
General notice in accordance with this section is a sufficient declaration of
35
interest in relation to the matters to which it relates.
(2)
General notice is notice given to the directors of a company to the effect that the
director—
(a)
has an interest (as member, officer, employee or otherwise) in a
specified body corporate or firm and is to be regarded as interested in
40
any transaction or arrangement that may, after the date of the notice, be
made with that body corporate or firm, or

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
76

(b)
is connected with a specified person (other than a body corporate or
firm) and is to be regarded as interested in any transaction or
arrangement that may, after the date of the notice, be made with that
person.
(3)
The notice must state the nature and extent of the director’s interest in the body
5
corporate or firm or, as the case may be, the nature of his connection with the
person.
(4)
General notice is not effective unless—
(a)
it is given at a meeting of the directors, or
(b)
the director takes reasonable steps to secure that it is brought up and
10
read at the next meeting of the directors after it is given.
172
Declaration of interest in case of company with sole director
(1)
Where a declaration of interest under section 168 (duty to declare interest in
existing transaction or arrangement) is required of a sole director of a company
that is required to have more than one director—
15
(a)
the declaration must be recorded in writing,
(b)
the making of the declaration is deemed to form part of the proceedings
at the next meeting of the directors after the notice is given, and
(c)
the provisions of section 231 (minutes of meetings of directors) apply as
if the declaration had been made at that meeting.
20
(2)
Nothing in this section affects the operation of section 215 (contract with sole
member who is also a director: terms to be set out in writing or recorded in
minutes).
173
Declaration of interest in existing transaction by shadow director
(1)
The provisions of this Chapter relating to the duty under section 168 (duty to
25
declare interest in existing transaction or arrangement) apply to a shadow
director as to a director, but with the following adaptations.
(2)
Subsection (2)(a) of that section (declaration at meeting of directors) does not
apply.
(3)
In section 171 (general notice treated as sufficient declaration), subsection (4)
30
(notice to be given at or brought up and read at meeting of directors) does not
apply.
(4)
General notice by a shadow director is not effective unless given by notice in
writing in accordance with section 170.
Chapter 4
35
Transactions with directors requiring approval of members
Service contracts
174
Directors’ long-term service contracts: requirement of members’ approval
(1)
This section applies to provision under which the guaranteed term of a
director’s employment—
40

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
77

(a)
with the company of which he is a director, or
(b)
where he is the director of a holding company, within the group
consisting of that company and its subsidiaries,

is, or may be, longer than two years.
(2)
A company may not agree to such provision unless it has been approved—
5
(a)
by resolution of the members of the company, and
(b)
in the case of a director of a holding company, by resolution of the
members of that company.
(3)
The guaranteed term of a director’s employment is—
(a)
the period (if any) during which the director’s employment—
10
(i)
is to continue, or may be continued otherwise than at the
instance of the company (whether under the original agreement
or under a new agreement entered into in pursuance of it), and
(ii)
cannot be terminated by the company by notice, or can be so
terminated only in specified circumstances, or
15
(b)
in the case of employment terminable by the company by notice, the
period of notice required to be given,

or, in the case of employment having a period within paragraph (a) and a
period within paragraph (b), the aggregate of those periods.
(4)
If more than six months before the end of the guaranteed term of a director’s
20
employment the company enters into a further service contract (otherwise than
in pursuance of a right conferred by or under the original contract on the other
party to it), this section applies as if there were added to the guaranteed term
of the new contract the unexpired period of the guaranteed term of the original
contract.
25
(5)
A resolution approving provision to which this section applies must not be
passed unless a memorandum setting out the proposed contract incorporating
the provision is made available to members—
(a)
in the case of a written resolution, by being sent or submitted to every
eligible member at or before the time at which the proposed resolution
30
is sent or submitted to him;
(b)
in the case of a resolution at a meeting, by being made available for
inspection by members of the company both—
(i)
at the company’s registered office for not less than 15 days
ending with the date of the meeting, and
35
(ii)
at the meeting itself.
(6)
No approval is required under this section on the part of the members of—
(a)
a body corporate that is not—
(i)
a company as defined in section 1 of this Act, or
(ii)
a body registered under the Companies Acts by virtue of
40
section 694 (bodies not formed under Companies Acts but
authorised to register);
(b)
a body corporate that is a wholly-owned subsidiary of another body
corporate.
(7)
In this section “employment” means any employment under a director’s
45
service contract.