|Company Law Reform Bill [HL] - continued||House of Commons|
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Clause 159: Duty to exercise independent judgment
315. This duty codifies the current principle of law under which directors must exercise their powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise (unless authorised by or under the constitution to do so).
316. The clause provides that directors must not fetter the future exercise of their discretion unless they are acting:
317. The duty does not confer a power on the directors to delegate, or prevent a director from exercising a power to delegate conferred by the company's constitution provided that its exercise in accordance with the company's constitution. Under the draft model articles of association for private companies limited by shares, the directors may delegate their functions in accordance with the articles.
Clause 160: Duty to exercise reasonable care, skill and diligence
318. This duty codifies the director's duty to exercise reasonable, care, skill and diligence. Traditionally, the courts did not require directors to exhibit a greater degree of skill than may reasonably be expected from a person with their knowledge and experience (a subjective test). More recently, the courts have said that the common law standard now mirrors the tests laid down in section 214 of the Insolvency Act 1986, which includes an objective assessment of a director's conduct. This clause is modelled on that section.
319. The clause provides that a director owes a duty to his company to exercise the same standard of care, skill and diligence that would be exercised by a reasonably diligent person with:
Clause 161: Duty to avoid conflicts of interest
320. This duty replaces the no-conflict rule applying to directors. Under the current no-conflict rule, certain consequences flow if directors place themselves in a position where their personal interests or duties to other persons are liable to conflict with their duties to the company, unless the company gives its consent. A conflict of interest may, in particular, arise when a director makes personal use of information, property or opportunities belonging to the company or when a director enters into a contract with his company. Conflicts of interest may also arise whenever a director makes a profit in the course of being a director, in the matter of his directorship, without the knowledge and consent of his company.
321. This duty covers all conflicts, actual and potential, between the interests of the director and the interests of the company. This includes conflicts relating to the exploitation of the company's property, information or opportunity for personal purposes. The only conflicts not covered by this duty, are those relating to transactions or arrangements with the company (interests in transactions or arrangements with the company must be declared under clause 163 in the case of proposed transactions or under clause 168 in the case of existing transactions unless an exception applies under those clauses).
322. Clause 166(4) preserves the ability of the members of a company to authorise conflicts that would otherwise be a breach of this duty.
323. Under clause 161(4)-(6) the duty is also not infringed if:
324. The present law is that in all cases, conflicts of interest must be authorised by the members of the company, unless some alternative procedure is properly provided. The CLR were concerned that this strict requirement might stifle entrepreneurial activity; and therefore recommended that, in the case of a private company, it should be possible for conflicts to be authorised by independent directors unless the company's constitution prevents this.
325. Under subsection (6), board authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors: the votes of the conflicted directors in favour of the decision are ignored and the conflicted directors are not counted in the quorum.
Clause 162: Duty not to accept benefits from third parties
326. This clause codifies the rule prohibiting the exploitation of the position of director for personal benefit. This duty prohibits the acceptance of benefits (including bribes). The acceptance of a benefit giving rise to an actual or potential conflict of interest will fall within the duty to avoid conflicts of interest (clause 161) as well as this duty. This specific duty dealing with benefits from third parties is not subject to any provision for board authorisation.
327. The ability of the members of a company to authorise the acceptance of benefits which would otherwise be a breach of this duty is preserved by clause 166(4).
328. The duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Benefits conferred by the company (and its holding company or subsidiaries) do not fall within this duty.
Clause 163: Duty to declare interest in proposed transaction or arrangement
329. The equitable rule that directors may not have interests in transactions with the company unless the interest has been authorised by the members is replaced by this duty. This clause requires a director to disclose any interest, direct or indirect, that he has in relation to a proposed transaction or arrangement with the company. The director does not need to be a party to the transaction for the duty to apply. An interest of another person in a contract with the company may require the director to make a disclosure under this duty, if that other person's interest amounts to a direct or indirect interest on the part of the director.
330. Under the current equitable rule shareholder approval is required for transactions between a company and a director. Company articles often modify the equitable rule, requiring disclosure of the conflict instead. As proposed by the CLR, shareholder approval for the transaction is not a requirement of the statutory duty. The members of the company may however still impose requirements for shareholder approval in the articles.
331. The duty requires directors to disclose their interest in any transaction before the company enters into the transaction (subsection (4)). The duty does not impose any rules on how the disclosure of interest must be made, but subsection (2) allows the disclosure to be made by written notice, general notice or disclosure at a meeting of the directors.
332. The director must declare the nature and extent of his interest to the other directors. It is not enough for the director to merely state that he has an interest.
333. If after he has disclosed his interest, he becomes aware that the facts have changed, or for some other reason the earlier disclosure is no longer accurate or complete, the director must make a further declaration, correcting the earlier one (subsection (3)). However, this is only necessary if the company has not yet entered into the transaction or arrangement at the time the director becomes aware of the inaccuracy or incompleteness of the earlier declaration (or ought reasonably to have become so aware).
334. As the duty requires disclosure to be made to the other directors, no disclosure is required where the company has only one director. There is no need to disclose anything the other directors already know about or ought reasonably to have known (subsection (6)(b)). A director will breach the duty if he fails to declare something he ought reasonably to have known, but the duty does not otherwise require a director to declare anything he does not know. Subsection (6)(c) makes special provision for service contracts that are considered by a meeting of the directors or a committee appointed for the purpose (such as a remuneration committee).
335. No declaration of interest is required if the director's interest in the transaction cannot reasonably be regarded as likely to give rise to a conflict of interest (subsection (6)(a)). Currently regulation 85 of Table A imposes a materiality test.
336. Conflicted directors may, subject to the company's articles of association, participate in decision-taking relating to such transactions with the company. Under the draft model articles of association for private companies limited by shares, the directors must in most circumstances disregard the views of an interested director
when taking a majority decision on a matter relating to such transactions with the company.
Clause 167: Modification of provisions in relation to charitable companies
337. This clause reverses certain relaxations made to the no-conflict rule as it applies to the directors of charitable companies in England and Wales.
338. Subsection (2)(a) replaces clause 161(3) which excludes conflicts of interest arising out of transactions or arrangements with the company. The replacement excludes such conflicts of interest from the duty only if or to the extent that the charitable company's articles so allow. The articles must describe the transactions or arrangements which are to be so excluded from the duty.
339. Subsection (2)(b) replaces clause 161(5) which allows authorisation for conflicts of interest to be given by the directors. The replacement only allows authorisation to be given by the directors where the charitable company's constitution expressly allows them to do so.
340. Subsection (3) restricts the application of clause 166(2)(b) which disapplies clauses 161 and 162 in relation to those matters excepted from the requirements for member approval under Chapter 4. Clause 166(2)(b) is restricted so that it only applies if or to the extent that the charitable company's articles allow the duties in clauses 161 and 162 to be disapplied. The articles must describe the transactions or arrangements which are to be so excluded from those duties.
341. Subsection (4) amends the Charities Act 1993 to give the Charity Commission the power to authorise acts that would otherwise be in breach of the general duties. This is necessary to preserve the current power of the Charity Commissioners to do so, in the light of the statutory statement of the general duties.
Clause 168: Declaration of interest in existing transaction or arrangement
342. This clause requires a director to declare the nature and extent of any direct or indirect interest that he has in any transaction or arrangement entered into by the company. It replaces the provision made by section 317 of the 1985 Act.
343. This chapter differs from the provisions of that section in a number of important respects. The main points are summarised below.
What should be declared?
344. Directors are required to declare any interest, direct or indirect, that they have in an existing transaction or arrangement entered into by the company. This clause only applies to transactions or arrangements already entered into by the company. Clause 163 (duty to declare interests) applies in the case of proposed transactions or arrangements with the company.
345. The director does not need to be a party to the transaction with the company in order for a declaration to be required under this clause. For example, where the director's spouse enters into a transaction with the company that may (but need not necessarily) give rise to an indirect interest on the part of the director in that transaction.
346. The declaration must be of the nature and extent of the director's direct or indirect interest.
347. If the director has declared his interest in accordance with clause 163 at the time the transaction was proposed, and before it was entered into by the company, the director does not need to repeat that declaration once the transaction becomes an existing transaction to which this clause applies (subsection (1)).
348. Furthermore, a director need not declare any interest:
349. A director is regarded as failing to make the declarations required by this clause if he fails to declare something that he ought reasonably to have known. But the director is not otherwise expected by this clause to declare things he does not know (subsection (5)).
When should the declaration be made?
350. The declaration should be made as soon as is reasonably practicable. But even if the declaration is not made as soon as it should have been, it must still be made (subsection (4)). If after a declaration has been made the director's interest in the transaction or arrangement changes, or the director realises that his interests were not
as originally declared, the director must make another declaration of interest, correcting or updating the earlier one (subsection (3)).
How should the declaration be made?
351. The declaration of interest must be made to the other directors using one of the following three methods; a declaration must be made:
Clause 169: Offence of failure to declare interest
352. A director who fails to comply with the requirements of clause 168 commits an offence. On conviction on indictment the maximum liability is an unlimited fine. On summary conviction the fine must not exceed the statutory maximum (currently £5,000). This clause does not affect the validity of the transaction or impose any other civil consequences for a failure to make the declarations of interest required by clause 168.
Clause 170: Declaration made by notice in writing
353. This clause provides a new written procedure for the declarations of interest required by clause 168. A written notice declaring the nature and extent of the director's interest must be sent to all the other directors. It may be sent in hard copy form or, if agreed, in electronic form. It may be posted, delivered by hand or, if agreed, by electronic means. When this is done, the notice is treated as forming part of the proceedings of the next meeting of the directors, and so should form part of the minutes of that meeting (subsection (5)).
Clause 171: General notice treated as sufficient declaration
354. This clause enables a director to give a general notice of his interests. A general notice is a declaration that the director is interested in another body corporate or firm, or that the director is connected with another person. If the company enters into a contract with the body corporate, firm or other person named in the general notice, the director does not need to declare any direct or indirect interest that he has in that contract arising as a result of his interest in the body corporate or firm named in the general notice or arising as a result of his connection to the person named in the general notice.
355. In order to be effective, the general notice must state the nature and extent of the director's interest in the body corporate or firm (for example, sole shareholder of the company) or the nature of his connection with the person (for example, spouse or
other connected person as defined in clause 235). The requirement to disclose the extent of the interest implements a recommendation of the Law Commissions.
Clause 172: Declaration of interest in case of company with sole director
356. Where a company has only one director, it is not possible for the director to declare his interests to the other directors, because there are no other directors. Therefore, a sole director does not need to comply with clause 168 (declaration of interest in existing transaction or arrangement).
357. The clause makes special provision where the company has only one director, when it should in fact have more than one director (for example, because it is a public company). In such a case, the sole director must record in writing the nature and extent of his interest in any transaction or arrangement that has been entered into by the company.
Clause 173: Declaration of interest in existing transaction by shadow director
358. This clause extends this Chapter to shadow directors, so that a shadow director must also declare the nature and extent of his interest in any transaction or arrangement that has been entered into by the company, in accordance with clause 168. The declaration must be made by notice in writing (clause 170) or by general notice (clause 171).
359. The declaration is not made at a meeting of the directors, as this is not appropriate in the case of a shadow director. If the shadow director makes the declaration by general notice, that notice must be given in accordance with the notice in writing procedure set out in clause 170. This means that a general notice given by a shadow director must comply with both clause 170 and the first three subsections of clause 171.
360. Otherwise, apart from clause 172 (declaration of interest in case of company with sole director), which is not relevant to a shadow director, all the other provisions of this chapter apply to a shadow director, including the exemptions in clause 168.
361. These Chapters contains several provisions designed to deal with particular situations in which a director has a conflict of interest. It replaces provisions of Part 10 of the 1985 Act, but with a number of changes. The aim of the changes is:
362. Provisions regulating directors' conflicts of interest fall into two main categories:
363. The four types of transaction requiring the approval of members (long-term service contracts; substantial property transactions; loans, quasi loans and credit transactions; and payments for loss of office) have been brought together within this Chapter.
364. This Part of the Bill also makes provision for disclosure to members:
365. On the other hand, the requirements in Part 10 of the 1985 Act to disclose, and maintain a register of, share dealings by directors and their families are repealed (see clause 816).
366. This Chapter sets out requirements for member approval in relation to four different types of transaction by a company:
367. The rules relating to each type of transaction tend to adopt the following structure: they begin with the rule requiring member approval, followed by exceptions to that rule and finally the consequences of breaching that rule.
Alignment of provisions
368. The provisions of this chapter have been aligned wherever appropriate so as to achieve greater consistency of approach. Particular examples of alignment are mentioned below.
369. This Chapter no longer imposes any criminal penalties for a failure to comply with its requirements.
370. The civil consequences of a failure to comply with the requirements for member approval of substantial property transactions and loans, quasi-loans and credit transactions have been aligned.
Approval by holding company
371. This Chapter applies to long-term service contracts, substantial property transactions, loans etc and payments for loss of office entered into by a company and involving either a director of the company or a director of the company's holding company. In the latter case, the transaction must be approved by both the company and the holding company (unless an exception applies).
Transactions between a company and the director of a fellow subsidiary
372. This Chapter does not normally apply to transactions entered into by a company that is neither the company of which the person is a director nor a subsidiary of the company of which the person is a director. The two exceptions are clause 202 (payment for loss of office in connection with transfer of undertaking) and clause 203 (payment for loss of office in connection with share transfer), where member approval is required for such a payment by any person to a director.
Exception for wholly-owned subsidiary
373. Approval is never required under this Chapter on the part of the member of a wholly-owned subsidiary or on the part of the members of an overseas company.
374. Clause 207 applies all the requirements of this chapter to shadow directors (with a small modification in the case of payments for loss of office).
375. Clause 208 provides the member approval required is an ordinary resolution, but the company's articles may impose higher requirements (such as a special resolution).
376. Where approval for a transaction or arrangement is required under more than one set of rules in Chapter 4, all relevant sets of rules should apply, unless otherwise provided (clause 210). For example, if the matter involves both a loan and a substantial property transaction, approval should be required under clause 176 and under clause 183 unless in each case a relevant exemption applies. Approval may be given for both purposes by a single resolution.
Memorandum with details of the transaction
377. In the case of long-term service contracts, loans etc and payments for loss of office, a memorandum setting out certain particulars about the transaction requiring approval of the members must be made available to the members.
378. If the approval is to be given by way of written resolution, the memorandum must be sent to the members able to vote on the written resolution no later than when the written resolution is sent to them. Clause 209 provides that any accidental failure to send the memorandum to one or more members will not invalidate the approval given by the members, unless the company's articles state otherwise.
|© Parliamentary copyright 2006||Prepared: 26 May 2006|