Company Law Reform Bill [HL]

House of Commons

Session 2005 - 06
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Company Law Reform Bill [HL]

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
93

203
Payment in connection with share transfer: requirement of members’
approval
(1)
No payment for loss of office may be made by any person to a director of a
company in connection with a transfer of shares in the company, or in a
subsidiary of the company, resulting from a takeover bid unless the payment
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has been approved by a resolution of the relevant shareholders.
(2)
The relevant shareholders are the holders of the shares to which the bid relates
and any holders of shares of the same class as any of those shares.
(3)
A resolution approving a payment to which this section applies must not be
passed unless a memorandum setting out particulars of the proposed payment
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(including its amount) is made available to the members of the company whose
approval is sought—
(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;
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(b)
in the case of a resolution at a meeting, by being made available for
inspection by the members 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.
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(4)
Neither the person making the offer, nor any associate of his (as defined in
section 430E of the Companies Act 1985 (c. 6)), is entitled to vote on the
resolution, but—
(a)
where the resolution is proposed as a written resolution, they are
entitled (if they would otherwise be so entitled) to be sent a copy of it,
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and
(b)
at any meeting to consider the resolution they are entitled (if they
would otherwise be so entitled) to be given notice of the meeting, to
attend and speak and if present (in person or by proxy) to count
towards the quorum.
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(5)
If at a meeting to consider the resolution a quorum is not present, and after the
meeting has been adjourned to a later date a quorum is again not present, the
payment is (for the purposes of this section) deemed to have been approved.
(6)
No approval is required under this section on the part of shareholders in—
(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
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corporate.
(7)
A payment made in pursuance of an arrangement—
(a)
entered into as part of the agreement for the transfer in question, or
within one year before or two years after that agreement, and
(b)
to which the company whose shares are the subject of the bid, or any
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person to whom the transfer is made, is privy,

is presumed, except in so far as the contrary is shown, to be a payment to which
this section applies.

Company Law Reform Bill [HL]
Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
94

204
Exception for payments in discharge of legal obligations etc
(1)
Approval is not required under section 201, 202 or 203 (payments requiring
members’ approval) for a payment made in good faith—
(a)
in discharge of an existing legal obligation (as defined below),
(b)
by way of damages for breach of such an obligation,
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(c)
by way of settlement or compromise of any claim arising in connection
with the termination of a person’s office or employment, or
(d)
by way of pension in respect of past services.
(2)
In relation to a payment within section 201 (payment by company) an existing
legal obligation means an obligation of the company, or any body corporate
10
associated with it, that was not entered into in connection with, or in
consequence of, the event giving rise to the payment for loss of office.
(3)
In relation to a payment within section 202 or 203 (payment in connection with
transfer of undertaking, property or shares) an existing legal obligation means
an obligation of the person making the payment that was not entered into for
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the purposes of, in connection with or in consequence of, the transfer in
question.
(4)
In the case of a payment within both section 201 and section 202, or within both
section 201 and section 203, subsection (2) above applies and not subsection (3).
(5)
A payment part of which falls within subsection (1) above and part of which
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does not is treated as if the parts were separate payments.
205
Exception for small payments
(1)
Approval is not required under section 201, 202 or 203 (payments requiring
members’ approval) if—
(a)
the payment in question is made by the company or any of its
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subsidiaries, and
(b)
the amount or value of the payment, together with the amount or value
of any other relevant payments, does not exceed £200.
(2)
For this purpose “other relevant payments” are payments for loss of office in
relation to which the following conditions are met.
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(3)
Where the payment in question is one to which section 201 (payment by
company) applies, the conditions are that the other payment was or is paid—
(a)
by the company making the payment in question or any of its
subsidiaries,
(b)
to the director to whom that payment is made, and
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(c)
in connection with the same event.
(4)
Where the payment in question is one to which section 202 or 203 applies
(payment in connection with transfer of undertaking, property or shares), the
conditions are that the other payment was (or is) paid in connection with the
same transfer—
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(a)
to the director to whom the payment in question was made, and
(b)
by the company making the payment or any of its subsidiaries.
206
Payments made without approval: civil consequences
(1)
If a payment is made in contravention of section 201 (payment by company)—

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Part 10 — Company directors
Chapter 4 — Transactions with directors requiring approval of members
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(a)
it is held by the recipient on trust for the company making the payment,
and
(b)
any director who authorised the payment is jointly and severally liable
to indemnify the company that made the payment for any loss resulting
from it.
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(2)
If a payment is made in contravention of section 202 (payment in connection
with transfer of undertaking etc), it is held by the recipient on trust for the
company whose undertaking or property is or is proposed to be transferred.
(3)
If a payment is made in contravention of section 203 (payment in connection
with share transfer)—
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(a)
it is held by the recipient on trust for persons who have sold their shares
as a result of the offer made, and
(b)
the expenses incurred by the recipient in distributing that sum amongst
those persons shall be borne by him and not retained out of that sum.
(4)
If a payment is in contravention of section 201 and section 202, subsection (2)
15
of this section applies rather than subsection (1).
(5)
If a payment is in contravention of section 201 and section 203, subsection (3)
of this section applies rather than subsection (1), unless the court directs
otherwise.
Supplementary
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207
Transactions requiring members’ approval: application of provisions to
shadow directors
(1)
For the purposes of—
(a)
sections 174 and 175 (directors’ service contracts),
(b)
sections 176 to 182 (property transactions),
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(c)
sections 183 to 198 (loans etc), and
(d)
sections 199 to 206 (payments for loss of office),

a shadow director is treated as a director.
(2)
Any reference in those provisions to loss of office as a director does not apply
in relation to loss of a person’s status as a shadow director.
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208
Transactions requiring members’ approval: nature of resolution required
(1)
The resolution of the members of a company required by any provision of this
Chapter is an ordinary resolution.
(2)
This is subject to anything in the company’s articles requiring a higher majority
(or unanimity).
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209
Approval by written resolution: accidental failure to send memorandum
(1)
Where—
(a)
approval under this Chapter is sought by written resolution, and
(b)
a memorandum is required under this Chapter to be sent or submitted
to every eligible member before the resolution is passed,
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Chapter 5 — Directors’ service contracts
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any accidental failure to send or submit the memorandum to one or more
members shall be disregarded for the purpose of determining whether the
requirement has been met.
(2)
Subsection (1) has effect subject to any provision of the company’s articles.
210
Cases where approval is required under more than one provision
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(1)
Approval may be required under more than one provision of this Chapter.
(2)
If so, the requirements of each applicable provision must be met.
(3)
This does not require a separate resolution for the purposes of each provision.
Chapter 5
Directors’ service contracts
10
211
Directors’ service contracts
(1)
For the purposes of this Part a director’s “service contract”, in relation to a
company, means a contract under which—
(a)
a director of the company undertakes personally to perform services (as
director or otherwise) for the company, or for a subsidiary of the
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company, or
(b)
services (as director or otherwise) that a director of the company
undertakes personally to perform are made available by a third party
to the company, or to a subsidiary of the company.
(2)
The provisions of this Part relating to directors’ service contracts apply to the
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terms of a person’s appointment as a director of a company.

They are not restricted to contracts for the performance of services outside the
scope of the ordinary duties of a director.
212
Copy of contract or memorandum of terms to be available for inspection
(1)
A company must keep available for inspection—
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(a)
a copy of every director’s service contract with the company or with a
subsidiary of the company, or
(b)
if the contract is not in writing, a written memorandum setting out the
terms of the contract.
(2)
All the copies and memoranda must be kept available for inspection at—
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(a)
the company’s registered office;
(b)
the place where its register of members is kept available for inspection
(if not at its registered office); or
(c)
its principal place of business (if that is situated in the part of the United
Kingdom in which the company is registered).
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(3)
The copies and memoranda must be retained by the company for at least one
year from the date of termination or expiry of the contract and must be kept
available for inspection during that time.
(4)
The company must give notice to the registrar—

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Chapter 6 — Contracts with sole members who are directors
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(a)
of the place at which the copies and memoranda are kept available for
inspection, and
(b)
of any change in that place,

unless they have at all times been kept at the company’s registered office.
(5)
If default is made in complying with subsection (1), (2) or (3), or default is made
5
for 14 days in complying with subsection (4), an offence is committed by every
officer of the company who is in default.
(6)
A person guilty of an offence under this section is liable on summary
conviction to a fine not exceeding level 3 on the standard scale and, for
continued contravention, a daily default fine not exceeding one-tenth of level
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3 on the standard scale.
(7)
The provisions of this section apply to a variation of a director’s service
contract as they apply to the original contract.
213
Right of member to inspect and request copy
(1)
Every copy or memorandum required to be kept under section 212 must be
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open to inspection by any member of the company without charge.
(2)
Any member of the company is entitled, on request and on payment of such
fee as may be prescribed, to be provided with a copy of any such copy or
memorandum.

The copy must be provided within seven days after the request is received by
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the company.
(3)
If an inspection required under subsection (1) is refused, or default is made in
complying with subsection (2), an offence is committed by every officer of the
company who is in default.
(4)
A person guilty of an offence under this section is liable on summary
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conviction to a fine not exceeding level 3 on the standard scale and, for
continued contravention, a daily default fine not exceeding one-tenth of level
3 on the standard scale.
(5)
In the case of any such refusal or default the court may by order compel an
immediate inspection or, as the case may be, direct that the copy required be
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sent to the person requiring it.
214
Directors’ service contracts: application of provisions to shadow directors

A shadow director is treated as a director for the purposes of the provisions of
this Chapter.
Chapter 6
35
Contracts with sole members who are directors
215
Contract with sole member who is also a director
(1)
This section applies where—
(a)
a limited company having only one member enters into a contract with
the sole member,
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(b)
the sole member is also a director of the company, and

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Chapter 7 — Directors’ liabilities
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(c)
the contract is not entered into in the ordinary course of the company’s
business.
(2)
The company must, unless the contract is in writing, ensure that the terms of
the contract are either—
(a)
set out in a written memorandum, or
5
(b)
recorded in the minutes of the first meeting of the directors of the
company following the making of the contract.
(3)
If a company fails to comply with this section an offence is committed by every
officer of the company who is in default.
(4)
A person guilty of an offence under this section is liable on summary
10
conviction to a fine not exceeding level 5 on the standard scale.
(5)
For the purposes of this section a shadow director is treated as a director.
(6)
Failure to comply with this section in relation to a contract does not affect the
validity of the contract.
(7)
Nothing in this section shall be read as excluding the operation of any other
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enactment or rule of law applying to contracts between a company and a
director of the company.
Chapter 7
Directors’ liabilities
Provision protecting directors from liability
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216
Provisions protecting directors from liability
(1)
Any provision that purports to exempt a director of a company (to any extent)
from any liability that would otherwise attach to him in connection with any
negligence, default, breach of duty or breach of trust in relation to the company
is void.
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(2)
Any provision by which a company directly or indirectly provides an
indemnity (to any extent) for a director of the company, or of an associated
company, against any liability attaching to him in connection with any
negligence, default, breach of duty or breach of trust in relation to the company
of which he is a director is void, except as permitted by—
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(a)
section 217 (provision of insurance),
(b)
section 218 (qualifying third party indemnity provisions).
(3)
This section applies to any provision, whether contained in a company’s
articles or in any contract with the company or otherwise.
(4)
Nothing in this section prevents a company’s articles from making such
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provision as has previously been lawful for dealing with conflicts of interest.
217
Provision of insurance

Section 216(2) (voidness of provisions for indemnifying directors) does not
prevent a company from purchasing and maintaining for a director of the

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Chapter 7 — Directors’ liabilities
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company, or of an associated company, insurance against any such liability as
is mentioned in that subsection.
218
Qualifying third party indemnity provision
(1)
Section 216(2) (voidness of provisions for indemnifying directors) does not
apply to qualifying third party indemnity provision.
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(2)
Third party indemnity provision means provision for indemnity against
liability incurred by the director to a person other than the company or an
associated company.

Such provision is qualifying third party indemnity provision if the following
requirements are met.
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(3)
The provision must not provide any indemnity against—
(a)
any liability of the director to pay—
(i)
a fine imposed in criminal proceedings, or
(ii)
a sum payable to a regulatory authority by way of a penalty in
respect of non-compliance with any requirement of a regulatory
15
nature (however arising); or
(b)
any liability incurred by the director—
(i)
in defending criminal proceedings in which he is convicted, or
(ii)
in defending civil proceedings brought by the company, or an
associated company, in which judgment is given against him, or
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(iii)
in connection with an application for relief (see subsection (6))
in which the court refuses to grant him relief.
(4)
The references in subsection (3)(b) to a conviction, judgment or refusal of relief
are to the final decision in the proceedings.
(5)
For this purpose—
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(a)
a conviction, judgment or refusal of relief becomes final—
(i)
if not appealed against, at the end of the period for bringing an
appeal, or
(ii)
if appealed against, at the time when the appeal (or any further
appeal) is disposed of; and
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(b)
an appeal is disposed of—
(i)
if it is determined and the period for bringing any further
appeal has ended, or
(ii)
if it is abandoned or otherwise ceases to have effect.
(6)
The reference in subsection (3)(b)(iii) to an application for relief is to an
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application for relief under—
section 804 (general power of court to grant relief in case of honest and
reasonable conduct), or
section 144(3) or (4) of the Companies Act 1985 (c. 6) (power of court to
grant relief in case of acquisition of shares by innocent nominee).
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219
Qualifying third party indemnity provision to be disclosed in directors’
report
(1)
This section requires disclosure of qualifying third party indemnity provision
in the directors’ report.