|Company Law Reform Bill [HL] - continued
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Clause 144: Existing under-age directors
268. This clause is a transitional provision. Subsection (2) provides that where a person under 16 has been appointed as director (or holds the office of director by virtue of another office or is a corporation sole) prior to the prohibition on under age directors coming into force, that person will cease to be a director when the prohibition in clause 142 comes into force. Subsection (3) makes it the company's responsibility to amend its register of directors accordingly but the company is not required to notify the registrar of the change. Subsection (4) gives the registrar power to amend the register without a notification by the company of the director's removal but rather on the basis of information already held (i.e. the date of birth as provided when the appointment was notified).
Clause 145: Appointment of directors of public company to be voted on individually
269. This clause replaces section 292 of the 1985 Act and has exactly the same effect: the appointment of each proposed director of a public company must be voted on individually unless there is unanimous agreement to a block resolution. Without such consent, any appointment of a director that is not voted on individually is void. This clause ensures that members can express their disapproval of any particular director without having to reject the entire board.
Clause 146: Validity of acts of directors
270. This clause, which replaces section 285 of the 1985 Act, provides that a director's actions are valid even if his or her appointment is subsequently found to have been defective or void.
Register of directors, etc
Clause 147: Register of directors
271. This clause replaces part of section 288 of the 1985 Act. It imposes on every company a requirement to keep a register of its directors (secretaries are dealt with in Part 12). This clause requires the register to be kept available for inspection at the company's registered office. It must be available for inspection by members (without charge) or the public (for a prescribed fee, set under powers provided under clause 744). Refusal to permit inspection is an offence. In addition, the court may compel immediate inspection of the register if the company has refused.
Clause 148: Particulars of directors to be registered: individuals
272. This clause replaces section 289 of the 1985 Act so far as it applies to individuals. It specifies the particulars that must be entered on the register of directors for each director who is an individual (as opposed to a company or similar entity). The most significant change is the requirement for companies to provide a service address rather than, as now, the director's usual residential address. A director may give the company's registered office as his or her service address; the service address may also be the same as the director's residential address - but this will not be apparent from the public record. In addition, in fulfilment of a Government commitment given in March 1998, the particulars no longer include details of other directorships held. There are also changes to the requirement to provide the director's name. The requirement is now to include any name by which the individual is or was formerly known for business purposes. As recommended by the CLR (Final Report, paragraph 11.38), there is no longer an exception for a married woman's former name. However the clause retains a protective provision relating to the former names of peers.
Clause 149: Particulars of directors to be registered: corporate directors and firms
273. This clause replaces section 289(1)(b) of the 1985 Act. It retains the requirement for the corporate or firm name and the registered or principal office to be recorded where the director is either a body corporate or a firm that is a legal person. In addition, as recommended by the CLR (Final Report, paragraph 11.38), it requires for EEA companies the register where the company is registered and its registration number; for all others, particulars of legal form of the company or firm, the law by which it is governed, and, if applicable, where it is registered and its registration number.
Clause 150: Register of directors' residential addresses
274. This clause is a new provision. It requires companies to keep a register of the usual residential addresses of directors who are individuals. This register is not to be open to public inspection, but can be used in accordance with Chapter 8 of this Part.
Clause 151: Particulars of directors to be registered: power to make regulations
275. This clause is a new provision. It provides power for the Secretary of State to make regulations that add or remove items from the particulars that have to be entered in a company's register of directors and register of directors' residential addresses.
Clause 152: Duty to notify registrar of changes
276. This clause replaces section 288(2) of the 1985 Act so far as it applies to directors. It retains the requirement that the appointment of a director, or a director's ceasing to hold office, and any change in an existing director's particulars be notified to the registrar within 14 days; default is an offence. It also requires a notice of appointment to be accompanied by the appointee's consent. This provision ensures that the public record is kept up to date. There is also a requirement to notify the registrar of information in the register of directors' residential addresses (but this information is not to be open to public inspection at Companies House).
Clause 153: Application of provisions to shadow directors
277. This clause replaces section 288(6) of the 1985 Act. It applies to shadow directors the requirements relating to a company's register of directors and register of directors' residential addresses and to notifying the registrar of changes in directors or particulars relating to them.
Clause 154: Resolution to remove director
278. This clause replaces, without change, section 303 of the 1985 Act. Subsection (1) provides that an ordinary resolution is sufficient to remove a director, but requires that it be at a meeting so as to ensure the director's right to be heard.
Clause 155: Director's right to protest removal
279. This clause replaces section 304 of the 1985 Act. There is no change of substance.
Clauses 156 to 167: General comments
280. The general duties form a code of conduct, which sets out how directors are expected to behave; it does not tell them in terms what to do. More particularly, the duties address:
281. The duties are derived from equitable and common law rules, and are not at the moment written down in statute.
282. The Law Commission and the Scottish Law Commission recommended that there should be a statutory statement of a director's main fiduciary duties and his duty of care and skill in their joint report Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties. The CLR's main recommendations in respect of directors' general duties are summarised in chapter 3 of the Final Report.
283. The CLR recommended that there should be a statutory statement of directors' general duties, and that this should, with two exceptions, described in the next paragraph, be a codification of the current law. In particular they wanted:
The Government has accepted these recommendations.
284. There are two areas, both relating to the regulation of conflicts of interest, where the statutory statement departs from the current law:
285. Both reforms implement recommendations of the CLR, which noted that the basic principles in the current law relating to directors' conflicts of interest are very strict:
286. These reforms are modified for charitable companies in England and Wales by clause 167.
Codification of common law rules and equitable principles
287. Codification is not a matter of transposing wording taken from judgments into legislative propositions. Judgments are, of necessity, directed at particular cases. Even when they appear to state general principles, they will rarely be exhaustive. They will be the application of (perhaps unstated) general principles to particular facts. In the company law field, the principles being applied will frequently be taken from other areas, in particular trusts and agency. It is important that these connections are not lost and that company law may continue to reflect developments elsewhere. Frequently the courts may formulate the same idea in different ways. In contrast legislation is formal. It is not easy to reconcile these two approaches but the draft clauses seek to balance precision against the need for continued flexibility and development. In particular:
288. The statutory duties do not cover all the duties that a director may owe to the company. Many duties are imposed elsewhere in legislation, such as the duty to deliver accounts and reports to the registrar of companies (clause 425). Other duties remain uncodified, such as any duty to consider the interests of creditors in times of threatened insolvency.
Duties owed to the company
289. Clause 156(1) makes it clear that, as in the existing law, the general duties are owed by a director to the company. It follows that, as now, only the company can enforce them. Part 11 (derivative claims and actions by members) describes the mechanism whereby members may be able to enforce the duties on behalf of the company.
Who are the duties owed by?
290. The duties are owed by every person who is a director of a company (as defined in clause 233). They are therefore owed by a de facto director in the same way and to the same extent that they are owed by a properly appointed director.
291. Certain aspects of the duty to avoid conflicts of interest and the duty not to accept benefits from third parties continue to apply even when a person ceases to be a director; this is necessary to ensure that a director cannot, for example, exploit an opportunity of which he became aware while managing the company's business without the necessary consent simply by resigning his position as director. The closing words of clause 156(2) provide that these duties apply to a former director subject to any necessary adaptations. This is to reflect the fact that a former director is not in the same legal position as an actual director.
292. The statutory duties apply to shadow directors where, and to the extent that, the common law rules or equitable principles which they replace so apply (clause 156(5)). This means that where a common law rule or equitable principle applies to a shadow director, the statutory duty replacing that common law rule or equitable principle will apply to the shadow director (in place of that rule or principle). Where
the rule or principle does not apply to a shadow director, the statutory duty replacing that rule or principle will not apply either.
The relationship between the duties
293. Many of the general duties will frequently overlap. Taking a bribe from a third party would, for example, clearly fall within the duty not to accept benefits from third parties (clause 162) but could also, depending on the facts, be characterised as a failure to promote the success of the company for the benefit of its members (clause 158) or as an aspect of failing to exercise independent judgment (clause 159).
294. The effect of the duties is cumulative, so that it is necessary to comply with every duty that applies in any given case. This principle is stated in clause 165. One exception relates to the duty to avoid conflicts of interest (clause 161). This particular duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company. In such cases the duty to declare interests in proposed transactions or arrangements (clause 163) or the requirement to declare interests in existing transactions or arrangements (clause 168) will apply instead. Clause 167 modifies these provisions for charitable companies in England and Wales.
295. The cumulative effect of the duties means that where more than one duty applies, the director must comply with each applicable duty, and the duties must be read in this context. So, for example, the duty to promote the success of the company will not authorise the director to breach his duty to act within his powers, even if he considers that it would be most likely to promote the success of the company.
296. As well as complying with all the duties, the directors must continue to comply with all other applicable laws. The duties do not require or authorise a director to breach any other prohibition or requirement imposed on him by law.
Relationship between the duties and the company's constitution
297. Under clause 157 a director must act in accordance with the company's constitution.
298. Companies may, through their articles, go further than the statutory duties by placing more onerous requirements on their directors (e.g. by requiring shareholder authorisation of the remuneration of the directors). The articles may not dilute the duties except to the extent that this is permitted by the clauses:
299. The company's constitution may also set out the purposes of the company, especially in the case of an altruistic company which has purposes other than the benefit of the company's members. It is very important that directors understand the purposes of the company, so that they are able to comply with their duty to promote the success of the company in clause 158.
Relationship between the duties and the detailed rules requiring member approval of conflicts of interest
300. Under the provisions in Chapter 4 of this Part, the directors must sometimes obtain prior shareholder approval for the following types of transaction involving a director (or, in some cases, a person connected to a director): long-term service contracts; substantial property transactions; loans, quasi loans and credit transactions; and payments for loss of office.
301. Clause 166 provides that:
Relationship between the duties and the general law
302. Clause 166(5) provides that the general duties have effect notwithstanding any enactment or rule of law except where there is an express or implied exception to this rule. For example, clause 230 provides that directors may make provision for employees on the cessation or transfer of a company's business even if this would otherwise constitute a breach of the general duty to promote the success of the company.
Consequences of breach
303. Clause 164 preserves the existing civil consequences of breach (or threatened breach) of any of the general duties. The remedies for breach of the general duties will be exactly the same as those that are currently available following a breach of the equitable principles and common law rules that the general duties replace.
304. Subsection (2) makes it clear that the duties are enforceable in the same way as any other fiduciary duty owed to a company by its directors (except for the duty to exercise reasonable care, skill and diligence, which is not considered to be a fiduciary duty). In the case of fiduciary duties the consequences of breach may include:
Clause 157: Duty to act within powers
305. This duty codifies the current principle of law under which a director should exercise his powers in accordance with the terms on which they were granted, and do so for a proper purpose. What constitutes a proper purpose must be ascertained in the context of the specific situation under consideration.
306. This duty codifies the director's duty to comply with the company's constitution. The constitution is defined for the purpose of the general duties in clause 240. As well as the company's articles of association it includes:
Clause 158: Duty to promote the success of the company
307. This duty codifies the current law and enshrines in statute what is commonly referred to as the principle of "enlightened shareholder value". The duty requires a director to act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole and, in doing so, have regard to the factors listed.
308. This list is not exhaustive, but highlights areas of particular importance which reflect wider expectations of responsible business behaviour, such as the interests of the company's employees and the impact of the company's operations on the community and the environment.
309. The decision as to what will promote the success of the company, and what constitutes such success, is one for the director's good faith judgment. This ensures that business decisions on, for example, strategy and tactics are for the directors, and not subject to decision by the courts, subject to good faith.
310. In having regard to the factors listed, the duty to exercise reasonable care, skill and diligence (clause 160) will apply. It will not be sufficient to pay lip service to the factors, and, in many cases the directors will need to take action to comply with this aspect of the duty. At the same time, the duty does not require a director to do more than good faith and the duty to exercise reasonable care, skill and diligence would require, nor would it be possible for a director acting in good faith to be held liable for a process failure which would not have affected his decision as to which course of action would best promote the success of the company.
311. In requiring directors to have regard to the interests of employees, this provision replaces section 309 of the 1985 Act.
312. Subsection (2) addresses the question of altruistic, or partly altruistic, companies. Examples of such companies include charitable companies and community interest companies, but it is possible for any company to have "unselfish" objectives which prevail over the "selfish" interests of members. Where the purpose of the company is something other than the benefit of its members, the directors must act in the way they consider, in good faith, would be most likely to achieve that purpose. It is a matter for the good faith judgment of the director as to what those purposes are, and, where the company is partially for the benefit of its members and partly for other purposes, the extent to which those other purposes apply in place of the benefit of the members.
313. Subsection (3) recognises that the duty to promote the success of the company is displaced when the company is insolvent. Section 214 of the Insolvency Act 1986 provides a mechanism under which the liquidator can require the directors to contribute towards the funds available to creditors in an insolvent winding up, where they ought to have recognised that the company had no reasonable prospect of avoiding insolvent liquidation and then failed to take all reasonable steps to minimise the loss to creditors.
314. It has been suggested that the duty to promote the success of the company may also be modified by an obligation to have regard to the interests of creditors as the company nears insolvency. Subsection (3) will leave the law to develop in this area.
|© Parliamentary copyright 2006
|Prepared: 26 May 2006