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 4 — Transactions with directors requiring approval of members
78

175
Directors’ long-term service contracts: civil consequences of contravention
If a company agrees to provision in contravention of section 174 (directors’
long-term service contracts: requirement of members’ approval)—
(a)
the provision is void, to the extent of the contravention, and
(b)
the contract is deemed to contain a term entitling the company to
5
terminate it at any time by the giving of reasonable notice.
Substantial property transactions
176
Substantial property transactions: requirement of members’ approval
(1)
A company may not enter into an arrangement under which—
(a)
a director of the company or of its holding company, or a person
10
connected with such a director, acquires or is to acquire from the
company (directly or indirectly) a substantial non-cash asset, or
(b)
the company acquires or is to acquire a substantial non-cash asset
(directly or indirectly) from such a director or a person so connected,

unless the arrangement has been approved by a resolution of the members of
15
the company or is conditional on such approval being obtained.

For the meaning of “substantial non-cash asset” see section 177.
(2)
If the director or connected person is a director of the company’s holding
company or a person connected with such a director, the arrangement must
also have been approved by a resolution of the members of the holding
20
company.
(3)
A company shall not be subject to any liability by reason of a failure to obtain
approval required by this section.
(4)
No approval is required under this section on the part of the members of—
(a)
a body corporate that is not—
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(i)
a company as defined in section 1 of this Act, or
(ii)
a body registered under the Companies Acts by virtue of
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
30
corporate.
(5)
For the purposes of this section—
(a)
an arrangement involving more than one non-cash asset, or
(b)
an arrangement that is one of a series involving non-cash assets,

shall be treated as if they involved a non-cash asset of a value equal to the
35
aggregate value of all the non-cash assets involved in the arrangement or, as
the case may be, the series.
(6)
This section does not apply to a transaction so far as it relates—
(a)
to anything to which a director of a company is entitled under his
service contract, or
40
(b)
to payment for loss of office as defined in section 199 (payments
requiring members’ approval).

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
79

177
Meaning of “substantial”
(1)
This section explains what is meant in section 176 (requirement of approval for
substantial property transactions) by a “substantial” non-cash asset.
(2)
An asset is a substantial asset in relation to a company if its value—
(a)
exceeds 10% of the company’s asset value and is more than £5,000, or
5
(b)
exceeds £100,000.
(3)
For this purpose a company’s “asset value” at any time is—
(a)
the value of the company’s net assets determined by reference to its
most recent statutory accounts, or
(b)
if no statutory accounts have been prepared, the amount of the
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company’s called-up share capital.
(4)
A company’s “statutory accounts” means its annual accounts prepared in
accordance with Part 15, and its “most recent” statutory accounts means those
in relation to which the time for sending them out to members (see section 406)
is most recent.
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(5)
Whether an asset is a substantial asset shall be determined as at the time the
arrangement is entered into.
178
Exception for transactions with members or other group companies

Approval is not required under section 176 (requirement of members’
approval for substantial property transactions)—
20
(a)
for a transaction between a company and a person in his character as a
member of that company, or
(b)
for a transaction between—
(i)
a holding company and its wholly-owned subsidiary, or
(ii)
two wholly-owned subsidiaries of the same holding company.
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179
Exception in case of company in winding up or administration
(1)
This section applies to a company—
(a)
that is being wound up (unless the winding up is a members’ voluntary
winding up), or
(b)
that is in administration within the meaning of Schedule B1 to the
30
Insolvency Act 1986 (c. 45) or the Insolvency (Northern Ireland) Order
1989 (S.I. 1989/2405 (N.I. 19)).
(2)
Approval is not required under section 176 (requirement of members’
approval for substantial property transactions)—
(a)
on the part of the members of a company to which this section applies,
35
or
(b)
for an arrangement entered into by a company to which this section
applies.
180
Exception for transactions on recognised investment exchange
(1)
Approval is not required under section 176 (requirement of members’
40
approval for substantial property transactions) for a transaction on a
recognised investment exchange effected by a director, or a person connected

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
80

with him, through the agency of a person who in relation to the transaction acts
as an independent broker.
(2)
For this purpose—
(a)
“independent broker” means a person who, independently of the
director or any person connected with him, selects the person with
5
whom the transaction is to be effected; and
(b)
“recognised investment exchange” has the same meaning as in Part 18
of the Financial Services and Markets Act 2000 (c. 8).
181
Property transactions: civil consequences of contravention
(1)
This section applies where a company enters into an arrangement in
10
contravention of section 176 (requirement of members’ approval for
substantial property transactions).
(2)
The arrangement, and any transaction entered into in pursuance of the
arrangement (whether by the company or any other person), is voidable at the
instance of the company, unless—
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(a)
restitution of any money or other asset that was the subject-matter of
the arrangement or transaction is no longer possible,
(b)
the company has been indemnified in pursuance of this section by any
other persons for the loss or damage suffered by it, or
(c)
rights acquired in good faith, for value and without actual notice of the
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contravention by a person who is not a party to the arrangement or
transaction would be affected by the avoidance.
(3)
Whether or not the arrangement or any such transaction has been avoided,
each of the persons specified in subsection (4) is liable—
(a)
to account to the company for any gain that he has made directly or
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indirectly by the arrangement or transaction, and
(b)
(jointly and severally with any other person so liable under this section)
to indemnify the company for any loss or damage resulting from the
arrangement or transaction.
(4)
The persons so liable are—
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(a)
any director of the company or of its holding company with whom the
company entered into the arrangement in contravention of section 176,
(b)
any person with whom the company entered into the arrangement in
contravention of that section who is connected with a director of the
company or of its holding company,
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(c)
the director of the company or of its holding company with whom any
such person is connected, and
(d)
any other director of the company who authorised the arrangement or
any transaction entered into in pursuance of such an arrangement.
(5)
Subsections (3) and (4) are subject to the following two subsections.
40
(6)
In the case of an arrangement entered into by a company in contravention of
section 176 with a person connected with a director of the company or of its
holding company, that director is not liable by virtue of subsection (4)(c) if he
shows that he took all reasonable steps to secure the company’s compliance
with that section.
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(7)
In any case—

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
81

(a)
a person so connected is not liable by virtue of subsection (4)(b), and
(b)
a director is not liable by virtue of subsection (4)(d),

if he shows that, at the time the arrangement was entered into, he did not know
the relevant circumstances constituting the contravention.
(8)
Nothing in this section shall be read as excluding the operation of any other
5
enactment or rule of law by virtue of which the arrangement or transaction
may be called in question or any liability to the company may arise.
182
Property transactions: effect of subsequent affirmation

Where a transaction or arrangement is entered into by a company in
contravention of section 176 (requirement of members’ approval) but, within a
10
reasonable period, it is affirmed—
(a)
in the case of a contravention of subsection (1) of that section, by
resolution of the members of the company, and
(b)
in the case of a contravention of subsection (2) of that section, by
resolution of the members of the holding company,
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the transaction or arrangement may no longer be avoided under section 181.
Loans, quasi-loans and credit transactions
183
Loans or quasi-loans: requirement of members’ approval
(1)
A company may not—
(a)
make a loan or quasi-loan to a director of the company or of its holding
20
company, or to a person connected with such a director, or
(b)
give a guarantee or provide security in connection with a loan or quasi-
loan made by any person to such a director, or to a person connected
with such a director,

unless the transaction has been approved by a resolution of the members of the
25
company.
(2)
If the director or connected person is a director of its holding company or a
person connected with such a director, the transaction must also have been
approved by a resolution of the members of the holding company.
(3)
A resolution approving a transaction to which this section applies must not be
30
passed unless a memorandum setting out the matters mentioned in subsection
(4) 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
is sent or submitted to him;
35
(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
(ii)
at the meeting itself.
40
(4)
The matters to be disclosed are—
(a)
the nature of the transaction,
(b)
the amount of the loan or quasi-loan and the purpose for which it is
required, and

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
82

(c)
the extent of the company’s liability under any transaction connected
with the loan or quasi-loan.
(5)
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
5
(ii)
a body registered under the Companies Acts by virtue of
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.
10
184
Meaning of “quasi-loan” and related expressions
(1)
A “quasi-loan” is a transaction under which one party (“the creditor”) agrees to
pay, or pays otherwise than in pursuance of an agreement, a sum for another
(“the borrower”) or agrees to reimburse, or reimburses otherwise than in
pursuance of an agreement, expenditure incurred by another party for another
15
(“the borrower”)—
(a)
on terms that the borrower (or a person on his behalf) will reimburse
the creditor; or
(b)
in circumstances giving rise to a liability on the borrower to reimburse
the creditor.
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(2)
Any reference to the person to whom a quasi-loan is made is a reference to the
borrower.
(3)
The liabilities of the borrower under a quasi-loan include the liabilities of any
person who has agreed to reimburse the creditor on behalf of the borrower.
185
Credit transactions: requirement of members’ approval
25
(1)
A company may not—
(a)
enter into a credit transaction as creditor for the benefit of a director of
the company or of its holding company, or a person connected with
such a director, or
(b)
give a guarantee or provide security in connection with a credit
30
transaction entered into by any person for the benefit of such a director,
or a person connected with such a director,

unless the transaction (that is, the credit transaction, the giving of the guarantee
or the provision of security, as the case may be) has been approved by a
resolution of the members of the company.
35
(2)
If the director or connected person is a director of its holding company or a
person connected with such a director, the transaction must also have been
approved by a resolution of the members of the holding company.
(3)
A resolution approving a transaction to which this section applies must not be
passed unless a memorandum setting out the matters mentioned in subsection
40
(4) 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
is sent or submitted to him;
(b)
in the case of a resolution at a meeting, by being made available for
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inspection by members of the company both—

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
83

(i)
at the company’s registered office for not less than 15 days
ending with the date of the meeting, and
(ii)
at the meeting itself.
(4)
The matters to be disclosed are—
(a)
the nature of the transaction,
5
(b)
the value of the credit transaction and the purpose for which the land,
goods or services sold or otherwise disposed of, leased, hired or
supplied under the credit transaction are required, and
(c)
the extent of the company’s liability under any transaction connected
with the credit transaction.
10
(5)
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
section 694 (bodies not formed under Companies Acts but
15
authorised to register);
(b)
a body corporate that is a wholly-owned subsidiary of another body
corporate.
186
Meaning of “credit transaction”
(1)
A “credit transaction” is a transaction under which one party (“the creditor”)—
20
(a)
supplies any goods or sells any land under a hire-purchase agreement
or a conditional sale agreement,
(b)
leases or hires any land or goods in return for periodical payments, or
(c)
otherwise disposes of land or supplies goods or services on the
understanding that payment (whether in a lump sum or instalments or
25
by way of periodical payments or otherwise) is to be deferred.
(2)
Any reference to the person for whose benefit a credit transaction is entered
into is to the person to whom goods, land or services are supplied, sold, leased,
hired or otherwise disposed of under the transaction.
(3)
In this section—
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“conditional sale agreement” has the same meaning as in the Consumer
Credit Act 1974 (c. 39); and
“services” means anything other than goods or land.
187
Related arrangements: requirement of members’ approval
(1)
A company may not—
35
(a)
take part in an arrangement under which—
(i)
another person enters into a transaction that, if it had been
entered into by the company, would have required approval
under section 183 or 185, and
(ii)
that person, in pursuance of the arrangement, obtains a benefit
40
from the company or a body corporate associated with it, or
(b)
arrange for the assignment to it, or assumption by it, of any rights,
obligations or liabilities under a transaction that, if it had been entered
into by the company, would have required such approval,

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
84


unless the arrangement in question has been approved by a resolution of the
members of the company.
(2)
If the director or connected person for whom the transaction is entered into is
a director of its holding company or a person connected with such a director,
the arrangement must also have been approved by a resolution of the members
5
of the holding company.
(3)
A resolution approving an arrangement to which this section applies must not
be passed unless a memorandum setting out the matters mentioned in
subsection (4) is made available to members—
(a)
in the case of a written resolution, by being sent or submitted to every
10
eligible member at or before the time at which the proposed resolution
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
15
ending with the date of the meeting, and
(ii)
at the meeting itself.
(4)
The matters to be disclosed are—
(a)
the matters that would have to be disclosed if the company were
seeking approval of the transaction to which the arrangement relates,
20
(b)
the nature of the arrangement, and
(c)
the extent of the company’s liability under the arrangement or any
transaction connected with it.
(5)
No approval is required under this section on the part of the members of—
(a)
a body corporate that is not—
25
(i)
a company as defined in section 1 of this Act, or
(ii)
a body registered under the Companies Acts by virtue of
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
30
corporate.
(6)
In determining for the purposes of this section whether a transaction is one that
would have required approval under section 183 or 185 if it had been entered
into by the company, the transaction shall be treated as having been entered
into on the date of the arrangement.
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188
Exception for expenditure on company business
(1)
Approval is not required under section 183 or 185 (requirement of members’
approval for loans etc) for anything done by a company—
(a)
to provide a director of the company or of its holding company, or a
person connected with any such director, with funds to meet
40
expenditure incurred or to be incurred by him—
(i)
for the purposes of the company, or
(ii)
for the purpose of enabling him properly to perform his duties
as an officer of the company, or
(b)
to enable any such person to avoid incurring such expenditure.
45